Christine Farnish, Chair of the UK P2P Finance Association

Christine Farnish, Chair of the UK P2P Finance Association

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The world’s leading industry self-regulatory body is, in my opinion, the Peer to Peer Finance Association (P2PFA) in the UK. From their establishment in 2011 the P2PFA have been very influential in implementing sensible regulation that supports the growth of the industry and they were also instrumental in getting a new kind of retirement account established in the UK: the Innovative Finance ISA.

In episode 48 of the Lend Academy Podcast I talk with Christine Farnish, long time Chair of the P2PFA, about these topics and much more. Now, I also should point out that this year LendIt is partnering with the P2PFA for their annual conference. Day two of LendIt Europe on October 21 will be the P2PFA Summit @ LendIt and will feature industry luminaries, investors, borrowers as well as regulators from the UK government.

In this podcast you will learn:

  • How she become Chair of the UK P2PFA.
  • Her initial thoughts on the p2p lending industry back in 2011.
  • The mission of the P2PFA and their role in developing regulation.
  • The importance of self-governance as a pre-cursor to regulation.
  • Why they wanted their own regulatory framework specifically for p2p lending.
  • How they worked with the Financial Conduct Authority (FCA) to produce the actual regulations.
  • An explanation of the current regulatory framework in the UK.
  • What the P2PFA did to help create the new Innovative Finance ISA.
  • Why the Innovative Finance ISA was such a big win for the UK p2p lending industry.
  • The requirements to become a member of the P2PFA.
  • Why the P2PFA decided to partner with LendIt for their annual conference.
  • Some of the highlights Christine is looking forward to at the P2PFA Summit @ LendIt.
  • The P2PFA thoughts on expanding beyond the UK.

Please read a transcription of our conversation below.


Welcome to the Lend Academy Podcast Episode No. 48. This is your host, Peter Renton, Founder of Lend Academy.

Peter Renton: Today on the show, we are heading across the pond to the UK. We have Christine Farnish who is the Chair of the UK Peer-to-Peer Finance Association. Now I’ve gotten to know Christine a bit over the last few months, she actually came on our LendIt China Tour with us. I got to spend some time with her there and also, we have had many conversations over the last few months as we are planning the next LendIt Europe conference in conjunction with the P2PFA. Day two of LendIt Europe is the P2PFA Summit at LendIt and we’ll talk a little bit about that, but this is not a commercial for LendIt Europe, we only touched on it briefly. What I really wanted to talk about here was the P2PFA, which in many cases people believe is really the model for a self-regulatory body and it has certainly been a very successful one in the UK so I wanted to talk about how they got started, what kind of things they’ve been able to achieve since they formed a few years back. Hope you enjoy the show.

Welcome to the podcast, Christine.

Christine Farnish: Thanks for having me, Peter.

Peter: Okay, so let’s just get started by giving the listeners a little bit of background about yourself and your career.

Christine: Well, I’m a Brit as you can tell.

Peter: (laughs)

Christine: I have worked on the boundary really between public and private sectors for the last 30 years or so in a whole range of different sectors mainly in financial services, but I’ve also worked in the telecommunications market as a regulator and currently sit on various boards regulating the water sector and the travel market so I’ve got quite a broad interest. I’ve done a lot of work on regulation and I’ve also done a fair bit of work on consumer protection in my time.

Peter: Okay, so then can you just share when peer to peer lending first got on your radar and how you became involved with the P2PFA?

Christine: Yeah, I was chairing a consumer body in my spare time, sitting on various other boards and it was after I’d left working full time at Barclays and I got a call out of the blue from Rhydian Lewis at RateSetter. He is the RateSetter CEO and he said….”Hi, are you Christine?” I said, “Yes.” And he said…”Well, I’ve been recommended to speak to you by a colleague who works in one of the major city law firms, he thinks you might be helpful to us. We’re looking for someone to chair our very new industry body to represent peer to peer lending.” So, I thought, wow, I better find out a bit more about this. I knew very little about it and I sort of read about it vaguely, but I hadn’t dabbled in it myself, it wasn’t really on my radar.

So what I did was I met up with Rhydian and I went around to the platforms. At that time there were only three members. It was RateSetter, Zopa and Funding Circle, but they were the three established platforms in the UK. This was kind of summer 2011 and I liked what I saw. What I saw was some very smart people who were really wanting to shake up retail financial services in the UK which to my mind a few years, I thought, has been a very sort of sluggish market and not particularly good for consumers and full of lots of bad practice, full of hidden costs and charges, very opaque…lots of people having nice city lunches at the consumers’ expense I always thought.

I thought this new innovative business model had a real good chance of providing some meaningful competition to some of these fairly sluggish incumbents so I liked it. Having met everyone and discussed what they wanted with them, they wanted someone who was really going to keep them on the straight and narrow, someone who was completely independent and help them to become better established and to work closely with government and with the regulator and try and get some decent regulation in the UK for everybody.

Peter: Okay.

Christine: I thought that was a worthy way to spend my time.

Peter: Sure, so when did you become chairman or chairperson, I should say?

Christine: I think it was announced in December 2011.

Peter: Okay.

Christine: Yeah, and then we started off with monthly meetings and gradually the membership grew and we’ve now got nine members.

Peter: Okay, so can you just tell us a little bit about the P2PFA…like what is your mission?

Christine: I think our mission is threefold.

Firstly, we try and maintain and promote high standards of business conduct in the market because this is a new sector. Lots of people don’t know about it, people aren’t sure about it, you know, it’s got a short track record. They’ve only been around here for ten years which when you think about banks, when you think about insurance companies and asset managers, they’ve been around for hundreds of years so people aren’t sure what we do. We’ve got a big job to do to try and educate people and raise awareness, but also to make sure that we keep our businesses clean and do the right things so that we can build that really crucial consumer confidence in this new market.

The other thing we exist to do is to, as I said earlier, it’s really to try and lobby for an effective regulatory regime and by effective it doesn’t mean big, fat rule book. It means the right sorts of rules that really focus on the risks in our types of business aren’t just things that are sort of cut and paste from some other part of the financial services market and dumped on us. It needs to be one that really is proportionate and focused on the risks in our particular type of financial services activity, very new.

Peter: Okay, so it sounds like the UK have put in what some people think is very sensible regulation, can you just sort of give us a little bit of history about that. I presume like starting in 2012 you started talking with the regulators yourself personally, can you just talk us through the process because we are, in some ways, starting this process in the United States. Probably it’s going to look very different and we already have an existing regulatory framework within which the platforms operate in the US, but in the UK it really wasn’t regulated. What were those early conversations like? Can you take us through that sort of process?

Christine: Sure, the first thing we did, and this is something that the guys had already started working on before I joined, was to set out some principles of doing business for ourselves so we had some self-regulation that we thought about and that we thought was sensible for peer to peer lending and it included things like sound credit risk management, obviously, anti-money laundering and fraud measures, protection of customer money so it was perfectly safe and nobody could get their hands on money that wasn’t theirs and run off plans if anything dreadful happened to make sure that the consumers on both sides of the deal could have the loans run off without them really noticing. So we’d already put that all in place.

We then decided that…well, this was the way we thought it would be best to work and I would recommend this in any market actually. What we didn’t want was to be tagged on to some existing part of the rule book…some regime that had been designed for some other type of business. We wanted to be a discreet regulated activity in our own right because we think we are different and there are particular things about the way we work which requires a fairly bespoke approach.

So we went to talk to government first because they’re the ones that control what does and doesn’t get regulated. We had a lot of conversations with the Treasury in the UK and the Treasury eventually agreed to define peer to peer lending and add us on to the statutes that has to be agreed by Parliament that defines the scope of what the financial services regulator does. So that was a big win.

So we’ve got our own regulated activity…we call it for short hand 36H simply because it’s clause 36H in this particular statutory instrument, but that’s our short hand. Once we are on the list of things that need to be regulated with a proper legal definition, the job then needs for the financial services regulator, in our case the Financial Conduct Authority to then authorize us, give us permission to do business and tell us which rules we have to abide by. So our next job was really lobbying and working closely with the FCA to try and ensure that the regime we ended up with was fit for purpose, properly risked based and proportionate because obviously, we’re small businesses and we are trying to break into very tough or established markets so it’s no good lumbering off with a whole load of very, very costly and burdensome things that we have to do because it would just kill the business altogether.

On the other hand, consumers are handing their money over on our platforms…so it’s really important they have some basic protections. You know, we can not run off with their money, we have to make sure that what we say we’re going to do, we do do and it’s all very transparent. So it’s those sort of things that we wanted and we ended up actually with a sort of set of formal rules very similar to what we had already developed in our self-regulatory model. So I think the fact that we had done that work first was really useful to us. It showed we were serious as well.

Peter: Right, that’s interesting that what you created was…the regulators kind of used your rules as a framework so it sounds like that would be considered very much a win for the P2PFA.

So then let’s just dive into it a little bit…I mean, there was this interim authority that was created back 18 months ago where you couldn’t just start a peer to peer lending business anymore, you had to apply for interim authority and I know it seems like over a hundred companies have done that and now we’re about to get into this full authority. Can you explain what the difference is between the interim and the full and where the UK is right now?

Christine: Yeah, this all gets fairly complicated. I’ll try and give you the simple version.

Peter: Alright, thank you. (laughs)

Christine: (laughs) From April 2014, the FCA which actually had only just been formed itself because you know what used to be the FSA, the Financial Services Authority split itself in two and half of it became the Financial Conduct Authority which is now our regulator…from April 2014, anyone who had already set up a platform and had a consumer credit license from the Office of Fair Trading, which you could get very easily and quickly, you know, within about a week at very low cost, so it wasn’t a big deal, was automatically grandfathered into authorization as an interim permission so they were allowed to go on doing business although no checks had been done on them to speak of.

So anyone who managed to get through that gateway before April 2014 and who could say they’ve already got this piece of paper from the OFT could get this interim permission status and do business on peer to peer lending on a provisional basis until this full regime came in. Anyone who started out after April 2014 and didn’t have this OFT piece of paper had to apply in full to the FCA and go through full authorization. Not many people did that because most people had the interim thing.

Peter: Right, they knew it was coming didn’t they.

Christine: Yeah, they knew it was coming, exactly so a lot of people got it on a precautionary basis and they’re not really doing any business, of course, as you would expect. What’s now happening and what is happening right now and is going to go on until Easter we think so there is sort of a six month period of intensive activity by the FCA where all of us have to now apply for full permission to do our business and the FCA crawls all over you, as they should, making sure that your systems have passed, that your controls, your risk management is strong, that you’ve got properly competent people running the business, that you’ve got all the things that their regime requires. They check it all, they visit, they require lots and lots of information. It’s a thorough process and hopefully, the platforms will come out the other end with their full permanent authorizations to do business in the UK. I’m sure all of our members will sail through that process. There could well be some other platforms out there where the FCA says…no, sorry, you’re not going to get the permission or you’ve got to do more work, come back next year. We don’t know yet.

Peter: Okay.

Christine: We also don’t know how many people are seriously applying so there you quote that number, a hundred, we don’t think it is a hundred or anything like.

Peter: Right.

Christine: More like somewhere between 20 and 40, I’d say,

Peter: Right, okay, fair enough. I saw Rhydian from RateSetter quoted recently saying it was going to cost them around half a million pounds to go through this whole process and he was actually happy with that because it sort of meant that it was a rigorous process and you weren’t going to get these fly by night operations coming in and getting a successful license. Is that what you’ve been hearing too?

Christine: Well I think it’s very important that it is a fairly robust process. Whether the FCA could streamline it or not is an interesting question. They probably could in an ideal world, but, hopefully, over time they will smarten up some of their processes to make it easier for the likes of us to go through this, but, actually, it is important it’s happening, it’s money well spent, but as I said earlier, consumer confidence is so crucial in this new developing market that so many people are still unsure about or haven’t really heard about, you know. What we don’t really want is front page news stories about platforms going bust and ripping people off.

Peter: Right, yeah. So, Okay I want to now talk about ISAs and just a little introduction to those who don’t know what they are, I mean, it stands for Individual Savings Account, right?

Christine: That’s right, yeah.

Peter: In the US we have Individual Retirement Accounts, IRAs, and so the equivalent in the UK is an ISA and there’s pretty strict rules about what kind of investments you can hold in an ISA not like in the US where IRAs are very flexible and you can put just about anything you like in there that is a bonafide investment and peer to peer lending has been one of them for many years now. So in the UK until recently or it’s still in existence, but it’s been announced in the budget in August that…or July I guess it was, that there’s going to be this new ISA…before now you’ve had a stocks and bonds ISA, and a cash ISA. There are two ISAs, so you couldn’t hold peer to peer lending investments in a tax deferred account.

Now starting in April of next year you are going to be able to invest in peer to peer lending platforms within this new ISA called the Innovative Finance ISA. So can you tell us a little bit about what work the P2PFA did to help that happen and what this means for the industry in the UK?

Christine: Yeah, sure, one of the things we’ve been banging on about both through the media and in private with ministers and government officials is the need to promote competition in retail markets, particularly the banking market. Actually, we are pushing on an open door as far as the government is concerned on this theme because as you probably are aware, there’s been a lot of controversy around our banking sector and whether or not we have too few very large banks.

There is actually a competition inquiry going on at the moment into retail banking for consumers and SME business. So, you know, people say…well, what do you do about that? Do you breakup the banks and try to make more banks or are there other ways of trying to bring competition into the market? And, of course, when peer to peer lending comes along and goes and talks to policy makers and says…hey, we are competition, we are bringing competition, we are bringing innovation, but we don’t have a level playing field. We don’t have a level playing field as far as tax is concerned, in particular. We think you need to do something about this because, otherwise, the market is kind of rigged.

They listened to us and we’ve been giving that message now for about three years and so we’ve done a lot of work on tax and being able to get this decision out of ministers that they were going to create a whole new type of ISA, not just have two types, cash on the one hand or stocks and shares, but to have this new type which actually we wanted to be called a Lending ISA. So far, they’ve said it’s going to be called an Innovative Finance ISA, but, hey, over time I expect people will start to call it a Lending ISA. We’ll see because that’s what it’s going to be.

It’s a huge win for us because it means we are part of the mainstream, one, and we will be able to operate on a equivalent basis to the banks or any other part of the investment market for retail consumer money, number two. So it’s very, very good. It means we’ll be able to grow pretty quickly over the next few years. You know, it’s going to allow a whole slug of new money to come in and really give us a big boost.

Peter: Right, yeah, I can imagine. There’s a lot of pent-up demand there, I’m sure. So I wanted just to talk briefly about joining the P2PFA. You’ve got nine members, you said, now. You’ve talked about your best practices, I mean, what are the actual criteria for a platform to come along and obtain membership. I know you haven’t accepted everybody who has applied. What does it take…do you just need to do all those best practices and then you’re fine or is there a deeper kind of analysis that you do to decide? What does it take to join the P2PFA?

Christine: Okay, you have to be doing viable peer to peer lending for six months so we want to see a bit of a track record there. We ask to see the business model and understand the basis on which the business works, we look at the financials, obviously, on a confidential basis and we then have a conversation with the platform explaining to them our rules and our operating principles and they have to demonstrate to us that they are already compliant with the standards we set or if they’re not already compliant, they’re going to be compliant. As long as all those things happen then we’re delighted to accept new members.

As I say, we started off with three, we’ve now got nine so we have been steadily growing over the last three years. It’s a balancing act here, Peter, between trying to be as representative as we possibly can of the peer to peer lending market, but also trying to make sure that we do have some boundaries about what is not acceptable in our terms because we do want consumers to be able to have confidence in what we do and we do want to be seen to be a source for good in the market. You know, people who are offering a good deal, providing good service, really shaking things up, offering a new choice to people who want to invest and save.

Peter: Okay, I get that. I think it’s going to be a balancing act and it sounds like you’ve done a pretty good job with it, so far. I’ve only ever heard good things to say about the P2PFA in the UK so I think you are achieving your mission.

I want to switch gears a little bit and talk about your annual conference which you had last year. This year we are producing it together, LendIt and the P2PFA are co-producing the annual conference. We have LendIt Europe coming up here. As we record, this is three weeks away and we have a two day conference for LendIt. Day one is really…LendIt is producing and day two is the P2PFA Summit at LendIt. So I guess, first question is why did you decide to partner with LendIt instead of just doing your own thing?

Christine: Well, we know you’re a good organization, Peter.

Peter: Thank you.

Christine: And we’ve heard very good things about LendIt and we have respect for your knowledge and expertise in this market on a more global basis than what we have. We thought…everything is moving very fast in different parts of the world, different jurisdictions seem to be going off in different directions and there is very, very few, if any, opportunities to actually pull things together and take stock of where everything is at and look at and sort of compare and contrast how it’s going in Europe, how it’s going in the States, how it’s going in other important markets like China and what we can learn from each other and having an event that allows the UK to explain what we’ve done here because we think it’s a very, very interesting story we have, but we know others elsewhere are quite interested in learning from us so having that opportunity, but also us being able to learn from markets outside the UK and across Europe.

We just think it’s really important at this stage in the market development because it’s all moving so fast. A lot of key decisions are going to get taken on regulation, you know, in the US and probably in Europe before too long so it’s really useful I think to have…you know, it’s an important contribution we can make to try and spread awareness and understanding about this new market, dispel some myths, get people to think a bit about the future and the sort of things that work well, the sort of things that work less well, share experience and learning.

Peter: Okay, so then can you give us a little bit of a preview about the P2PFA Summit at LendIt and some of the highlights that you think will be really of interest to attendees?

Christine: Sure, well, we’ve got all of our member platforms on at some point or other during the event, learning who they are, what they do, why they do it. We’ve got the Minister from the new government, Treasury Minister, who is responsible for the peer to peer lending regulation and financial services regulation more generally and she’s very interesting, Harriet Baldwin. She hasn’t spoken publicly very much so this speech will be of huge interest to a lot of people. She has a financial services background herself, she used to work for JPM so she’s duck egg and (laughs)…use a nice British phrase, I think it’s Yorkshire actually.

We’ve got the regulator speaking, an executive board member from the FCA talking about why they developed the regime they did and what they’ll be looking at when they come to review everything next year. We’ve got some panels with real borrowers, real SME case studies of people who have turned to peer to peer lenders in order to keep their business on track and grow it and fuel jobs and growth in our economy explaining how it’s worked for them and we’ve got real consumers who lend their money on peer to peer platforms as well so we think altogether it’s a great mix.

Peter: Okay, obviously, we have worked together over the last few months to put all the agenda for both days together. I am also personally very excited about our alliance and this event that’s coming up here shortly.

So before I let you go, I’ve got a few more questions. I wanted to just get your feel about Europe. Obviously, in Europe, UK is by far the leading player as far as loan volume, about entrepreneurial activity, the UK is leading the way and the Peer-to-Peer Finance Association has been totally focused on the UK, but I wanted to get your opinion about the rest of Europe. Is this something that you see expanding into Continental Europe as far as your organization goes?

Christine: I see it as a big opportunity there and we have had approaches from one or two platforms that are EU-based. So it will be interesting to see how the event goes, our conference, and the conversations that maybe happen after that, Peter, so I think it’s a “watch this space”.

Peer to peer lending in Europe has an awful lot to offer and I think the part of the commission that’s responsible for financial services that’s looking at the capital market union policy is very alive to the need to start to boost productivity and growth in Europe, across Europe and the need to find new ways of channeling funds through to entrepreneurs and peer to peer lending offers huge opportunities as both you and I know. So I’m sure at some point we will end up with some sort of regulatory framework that allows peer to peer lenders to compete fairly in all member states with the likes of banks. That isn’t the case at the moment.

Peter: Right, and there isn’t right now a strong self-regulatory body like the P2PFA anywhere in Europe, is that correct?

Christine: That is correct. There are some small bodies in various member states, but I don’t think they are on the scale that we are nor as well established and experienced as we are now.

Peter: Right.

Christine: So I think we’re well placed, but, obviously, there are sensitivities in mainland Europe particularly about the Brits and some see us as rabidly Anglo Saxon and pro, you know, liberal market economies at all costs and we don’t think enough about little people and consumer protection and they don’t like the openness of some of our markets and they don’t like the Brits telling them how to do things. (laughs) You know, all of those sorts of sensitivities need to be carefully navigated.

Peter: Right, okay, that’s going to be very interesting. Okay, one last question on a personal note, I wonder if you could explain the letters after your name. When you send out an e-mail you have your signature Christine Farnish, CBE. For those of us who aren’t part of the British Commonwealth…can you explain what CBE means?

Christine: Well, actually, it’s not the Commonwealth, it’s better than that, Peter. It’s Commander of the British Empire. (laughs)

Peter: Oh, it’s the Empire, of course. (laughs)

Christine: It’s some bizarre thing, I mean, when you do stuff and work closely with government if they think…it’s a mysterious, opaque process. How anyone gets these things, God only knows.

Peter: (laughs)

Christine: You know, every…twice a year, with the Queen’s birthday honors and the New Year honors, various people’s names appear on various lists and you troupe along Buckingham Palace and you get given a gong so I’ve got one of these gongs and it says it’s for services to financial services and consumer affairs so, you know…that’s as much as I know.

Peter: (laughs) On that note, I’ll let you go. I really appreciate your time today, Christine.

Christine: You’re very welcome, Peter, and I’m looking forward to the conference enormously.

Peter: Likewise, okay, well, see you soon.

Christine: Yeah. Bye.

Peter: As I mentioned in the beginning of the show, the US is in some ways going through what the UK has already done and that is the government is getting involved. We’ve had the Treasury request information from the industry about peer to peer and marketplace lending. And while we are regulated in the US, as I said…the regulations…there’s a myriad of different regulations here and it certainly isn’t as clean and as helpful as what the UK has done. So it’s going to be interesting to see how things shake out here in the US.

I’ve encouraged regulators to look to the UK model as one that if you wanted to start from scratch and I’m not suggesting for a minute that the regulators start from scratch, but if you were to look at something that is successful, that is embraced by not just the industry, but by investors and borrowers as well, the UK is a great model for the rest of the world. I think what the Peer-to-Peer Finance Association has done has really driven through a lot of this regulation and have really helped shape it. I think they’re a very successful organization and something that the rest of the world would do well to emulate.

Anyway, on that note, I’ll sign off. I very much appreciate your listening and we’ll catch you next time. Bye.