Overview of the Regulatory Framework for P2P Lending and Equity-based Crowdfunding in Singapore

This is a guest post by Pawee Jenweeranon, a graduate school student of the program for leading graduate schools – cross border legal institution design, Nagoya University, Japan. Pawee is a former legal officer of the Supreme Court of Thailand. His research interests include internet finance and patent law in the IT industry.

1. Introduction

In the recent years, it is inevitable that the financial technology or Fintech takes the significant role toward the evolution of financial services industry in this region. In other words, Fintech normally be used to improve the financial industry services.

In 2015, the Monetary Authority of Singapore (hereinafter referred to as “MAS”) has committed two hundred twenty five million Singapore Dollar (around 166 million USD) to support the development of Fintech industry for the startup ecosystem in the upcoming years[1]. This is a good reflection of the significance of the financial technology or Fintech development in Singapore.

From the economic perspective, Small and Medium Enterprises (hereinafter referred to as “SMEs”) are important part of Singapore’s economy. SMEs account for 99 percent of all registered enterprises in Singapore[2]. From this reason, enhancing the competitive capacity of Singapore SMEs is essential for Singapore economy development.  Even almost all of the SMEs in Singapore are supported by the Governmental Enterprise Development Agency and Centers[3], (more than 100,000 SMEs got funding support by the Singapore government[4]); however, internet financial technology was also proposed as an alternative mechanism for enhancing the competitiveness of Singapore SMEs in the recent years[5].

 

2. Regarding Peer to Peer Lending


2.1 Background

Generally, there are many peer to peer lending platforms in Singapore; however, they normally lend money to businesses rather than individuals due to the strict regulation for money lenders. The additional limitation on lending to low-income borrowers[6] who are Singaporean citizens or permanent residents which is another requirement should be considered by the lenders.

In general, money lending in Singapore is mainly regulated by the Moneylenders Act 2010 and the Moneylenders Rules 2009. For the Moneylenders Act 2010, due to the main purpose of this act is to develop consumer protection mechanism to protect borrowers of small amount loans[7], this is the reason why the act provides stringent limitation for moneylenders to operate their business. This is another key different of money lending law of Singapore compared to other countries in Asia such as Hong Kong which focusing more on lending activity[8]. Briefly, the act requires moneylenders to hold the Moneylenders license with obligations and limitations for licensee[9].

In Singapore, even there are strict regulations in the existing law relating to a money lending business; however, there is the legislative effort of the Singapore government to address the issue regarding Securities-based Crowdfunding, which can reflect the understanding of the Singapore government toward the development of Financial Technology (Fintech) and the supporting regulatory framework.[10]

2.2 The Regulatory Framework for Peer to Peer Lending Business

From the document published by the MAS on Lending-based Crowdfunding – Frequently Asked Questions (FAQs)[11], generally, the operation of P2P lending is restricted by MAS under the Securities and Futures Act (Cap. 289) (SFA) and the Financial Advisers Act (Cap. 110) (FFA).

Specifically, the P2P lending business needs to prepare and register a prospectus with MAS in accordance with Section 239(3) of the SFA. In addition, not only the registration of the prospectus but also the P2P lending platform need to follow the licensing requirements, particularly, the P2P lending business which fall within the scope provided by MAS needs to hold a Capital Market Services (CMS) license. Continue reading

Regulation of P2P Lending in Malaysia

This is a guest post by Kylie Greeff of whitelabelcrowd.fund

As one of the first countries in Asia to publish a regulatory regime, Malaysia is opening up to entrepreneurs, institutions and global operators to facilitate the ease of business credit through P2P lending. Ranked 18th on the World Banks’ Ease of Doing Business league tables, Malaysia is positioning itself as the conduit for global players to setup in Kuala Lumpur as gateway for serving P2P lending markets across Asia. Malaysia has one of the highest levels of financial inclusion in the world at 92 per cent and the country has taken advantage of mobile phones and online banking to expand access.
The recently published Securities Commissions (SC) of Malaysia’s rules on the operation of a Peer-to-Peer platform sets out the minimum requirements for the compliant operation of a Loan based crowdfunding platform in Malaysia.

Given the recent publication of the SC’s rules, we have undertaken a comparison of the regulatory requirements imposed on Malaysian P2P platforms with their UK counter parts. The comparison highlights a number of differences first both in the rules that must be followed to operative a platform as well as the minimum standards imposed on operators operating the platforms in Malaysia. Whilst the comparison identifies a number of differences between the two bodies of regulation, this is not unexpected give the differences in maturity of the two markets. P2P in its earliest form began in 2005 in the UK, with the UK regulator announcing its intention to regulate the sector in 2013. The UK’s early P2P regulations were very similar to those now produced by the SC.

The SC in their production of their regulations have clearly done their research into the rules implemented by many platforms and regulators around the world in helping them draft their first guidelines, and have arguably used the UK’s regulations as their closest reference. A strategy that appears to have been widely adopted in their regulation of other financial markets as well.
Below is a more detailed review of the UK and Malaysian regulation.

Capital Requirements

The first noticeable difference in the platform operator rules is the requirements by the SC for a platform to have a minimum paid-up capital of RM5 million (approx. £80,000). The UK regulatory body the Financial Conduct Authority (FCA) does not impose a minimum capital requirement for the start-up of a platform. The FCA instead imposes a capital adequacy Requirement (CAR) on platforms once they are trading and authorised by the regulator. A platform’s CAR requirement is based on the trading performance of the platform weighed against its loan book. The SC’s decision to incorporate a minimum capital level on start-up platforms could be seen as a possible reaction to the recent debate in the UK and USA about the possible implementation of Capital requirements on P2P platforms similar to those currently applicable to banks. This being said, the requirement of RM 5m is not prohibitively high and may not be seen by many market entrants as a particularly high barrier to entry, particularly by those supported by financial institutions familiar with far more prohibitive capital requirements.

Whilst the FCA does not have a start-up paid up capital requirement, recent feeling and expectation in the UK is that the FCA will potentially move to more onerous Capital Requirements similar to those imposed on many other financial institutions.

Investor Communication and Transparency

It is interesting to note that the SC has decided to enforce a specific requirement on P2P operators to use ‘an efficient and transparent risk scoring system’ and to ‘carry out a risk assessment on issuers’. The FCA imposes no such requirement on platforms, although the majority of platforms do incorporate a risk rating identification system for the benefit of lenders, the platforms do not openly publish their system or processes as these are closely guarded as valuable IP of the platforms. In the absence of a specific requirement to have an ‘efficient and clear risk scoring system’ the FCA would expect platforms to assess their market and client needs and ensure that they operate with in the FCA’s Principles for Business (PRIN), most notably in regard to risk modelling, Principles 5,7 and 9. It’s worth noting here that the SC operate similar principles in terms of Fund Management Companies, see Guidelines On Compliance Function For Fund Management Companies.

Kylie Greef at Fintech NorthThe language used by the SC of ‘efficient and transparent’ is surprisingly vague and may be intentionally left as such to allow platforms the space to develop naturally allowing the SC room to review practices and later set what they deem to be appropriate transparent and efficient processes.

In its list of Operator Obligations, the SC appears intent on ensuring that the platform operators acknowledge and respond to the need to maintain transparency between the investors and the Issuers and to make investors aware of the nature of their investment. This can be seen in rules 13.05 (d-f).
Interestingly rule 13.05 (d) requires operators to ‘carry out investor education programmes’. The FCA again poses no requirement on platforms to ‘educate’ their investors but it does impose standards of disclosure and business conduct in its Handbook. The FCA expects platforms to take measures to ensure that they are open and transparent about the nature of the investment products it offers and that information is clearly displayed and prominent for investors (COBS 2.2.1 and 2.2.2).

Carrying out educational programmes in the form of video’s and blog post as well as informative events are a good way to encourage a higher level of customer engagement, but also goes a long way to building the trust of investors in the platform. Rebuildingsociety.com has benefited greatly from publishing a number of blogs about its journey, the types of investment it offers, the internal processes it uses to ensure the efficient and safe operation of the platform. Transparency is greatly valued by both the investors and the regulators.

Anti-Money Laundering and Financial Crime Prevention

As expected, the SC has incorporated the need and responsibility of platforms to ensure that they carry out sufficient Anti Money Laundering (AML) and Financial Crime (FC) Prevention practices as part of their normal operating processes. AML and FC are increasingly sensitive areas. Whilst the SC’s Guidelines on Recognized Markets does not set out specific instructions and guidance on the expected processes and levels of due diligence required by platforms, platforms should look to the SC’s ‘Guidelines On Prevention Of Money Laundering And Terrorism Financing For Capital Market Intermediaries’ which was developed from Section 83 and section 66E of the Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (AMLATFA) and section 377 of the Capital Markets and Services Act 2007 (CMSA). This document sets out the SC’s expectations of platforms in relation to AML and FC prevention.

The SC’s guidelines on AML and FC prevention are broadly similar to those of the FCA set out in SYSC 6.3, in that advocate a risk based, profiling approach to AML and FC prevention processes and require firms to incorporate enhanced Due Diligence practices where individuals are profiled to be higher risk. Continue reading

Interview with Gregor Gregersen, CEO of Silver Bullion

What is Silver Bullion about?

Silver Bullion buys, sells, authenticates and stores physical gold and silver. Since mid-2015 we also launched the option for customers to securely lend and borrow to each other using their bullion as collateral.

What are the three main advantages for investors?

Physical bullion buyers receive the best protection possible (in jurisdictional, counterparty and storage risk terms) against systemic crises by being owners of insured physical property under Singapore law rather than bank creditors exposed to financial crises. They also have a long position in gold / silver. They profit from a financial collapse, hyperinflation or foreign nationalizations.

Alternatively, as lenders they receive a safe return (very low risk) by lending their funds to owners of insured and authenticated bullion stored with us. Lender funds are collateralized by a minimum 200% worth of gold and silver and, should during the duration of the loan, the collateral fall to 125% the borrowers will get a margin call. At 110% we will liquidate (sell) the borrower’s silver and gold to ensure the lender’s funds are always fully covered by liquid collateral.

Lenders can offer their funds at an interest rate and duration of their choosing. Borrowers are then free to accept the best rates and vice versa, thereby creating a Bid/Ask exchange which lets lender and borrowers determine their own interest rates. The system is also inexpensive (0.5% fee) and easy to use as borrowers do not need to be rated or scored due to their collateral.

What are the three main advantages for borrowers?

Because the loans involve so little risk (due to collateral) lenders are willing to accept comparatively low interest rates. Therefore borrowers can borrow cheaply (e.g. 4% p.a.) and unlock their bullion liquidity without selling it. The low rates allow for arbitrage opportunities vs. customer in high interest countries.

Because we have an abundance of lenders Borrowers can quickly and easily get a loan whenever they need it, without any usage restrictions and minimal additional paperwork.

Borrowers can choose to easily roll-over /refinance a loan before maturity. So they could roll-over as needed, giving them flexibility and a source of optional liquidity when needed.

Investors are required to open a storage account first. Doesn’t that deter those that only want to invest?

A storage account is required to do our AML and KYC checks and an account number is the pre-requisite to do P2P transactions. A customer / lender does not need to buy or store bullion and there is no cost associated with opening an account. So there is no downside.

Gregor GregersenWhat ROI can investors expect?

P2P Lenders have received secure returns ranging from 3.5% to 7% p.a. depending on currency, duration and borrower/lender demand. The nature of the bullion collateral also means are also well protected against both a borrower default and systemic defaults in a crisis.

It depends on the lender whether and how he values this risk diversification.

Is the technical platform self-developed?

Yes. It is highly specialized platform that is integrated with our bullion storage system which stores around 120 million SGD worth of physical bullion.

A word about the people who designed this P2P system might be in order. Gregor Gregersen (primary architect) was a senior data architect for Commerzbank (the second largest German bank), Otbert de Jong headed the global risk advisory department at ABN AMRO Bank and was a partner in PricewaterhouseCoopers and Simon Black is the founder of Sovereign Man, which is one of the best resources on internationalisation and spreading your risk. Continue reading

Interview with Craig Moore, CEO of Beehive

What is Beehive about?

Beehive is the first and only P2P financing platform in the UAE (United Arab Emirates). Otherwise known as marketplace lending, peer-to-peer finance is the practice of lending money to unrelated individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other traditional financial institution. Beehive bridges a significant funding gap that currently exists in the UAE market. Our platform applies the innovative technology of crowdfunding to eliminate the cost and complexity of conventional finance. Businesses bypass conventional intermediaries and receive financing directly from the crowd. This enables them to get faster access to lower cost finance, while investors get better returns. Beehive is a facilitator that enables businesses to secure the funding they need by creating the organizational framework and infrastructure required for community and financial support to materialize.

What are the three main advantages for investors?

The three main advantages for investors are:

  1. No Barrier to Entry: Individual investors can invest from as little as AED 100 into each business listed on the platform and receive monthly repayments currently averaging 12% per annum with reinvested returns. Investors get money transferred into their account in as little as two days.
  2. Diverse Portfolio: By investing on the Beehive platform, investors can diversify their risk across a number of products offered to a variety of companies operating across diverse sectors, with new companies listing on the platform every week. They are able to directly invest in a business they believe in. Investors are also able to buy or sell their finance parts to other investors on the platform through Beehive’s secondary market. This gives investors access to a market place where they can trade finance parts and allows greater access to liquidity and diversification.
  3. Sharia Compliant Structure: Beehive allows investors to ethically invest in some of the most innovative SMEs in the UAE. Beehive supports Dubai’s ambition to be a Global Financial Capital with its innovative Sharia-compliant platform, which helps Islamic finance customers to achieve their financial goals in a more ethical structure, and helps compliant SMEs tap sources of Islamic finance liquidity. Beehive was certified by the Shariyah Review Bureau (SRB) as a Sharia-compliant P2P finance platform in September 2015, making it the first P2P platform in the world to independently confirm its processes are compliant with Sharia principles.

What are the three main advantages for borrowers?

The three main advantages for borrowers are:

  1. Cost of finance: The platform offers considerable savings to businesses that need it: Businesses using Beehive save on average 30% on their financing costs. The average bank borrowing rate (unsecured) for SMEs in the UAE is over 18%, often much higher. Because investors compete for rates in a reverse auction process, business receive the lowest possible average rate from investors.
  2. Time to finance: The Beehive online marketplace facilitates faster, more flexible funding, with companies typically getting a decision on their finance requests in 3 days. The application process is completed online, and businesses receive funding in 14 days or less.
  3. Invoice Financing: Beehive’s SME invoice financing tool is designed to serve SMEs and help them manage their cashflows by closing the gap between the issue of an invoice and the receipt of actual payment. By unlocking the value of their accounts-receivable, they are able to tackle the dual challenges of rising inflation and late payments. These products give SMEs more options to plug invoice gaps, giving them greater control over their business and finances, and thus a greater opportunity for security and growth.

Craig Moore, BeehiveWhat ROI can investors expect?

The average return for investors is 12% per annum with reinvested returns

Please tell me more about Islamic Finance and Sharia Compliance. Is that a main factor for attracting clients?

One of the things we are very proud of is receiving our Sharia Certification. Globally we’re the first platform to be certified sharia compliant. It was our plan from the beginning to make a sharia P2P platform, because it hadn’t been done before and it would open a new asset class to Islamic investors. About 80-90% of businesses on the platform are Sharia compliant. What we find is that if the listing is sharia compliant, then investors will engage with the business whether they are conventional or Islamic, so it is a very attractive feature for both investors and businesses across the board.

How did you start Beehive? Is the company funded with venture capital?

Beehive has so far received two rounds of external funding in addition to founding investment.

Is the technical platform self-developed?

All the technology on the Beehive platform has been developed using in-house capabilities. Our in-house IT development, design and creative teams allow us to be agile and responsive to market needs. Continue reading

Interview with Kelvin Teo and Reynold Wijaya, Founders of Funding Societies

What is Funding Societies about?

Funding Societies is a peer-to-peer (P2P) lending marketplace for small-medium enterprises (SMEs) to get loans to grow and investors to get good returns in Singapore. We pride ourselves on innovation, as the first and only platform in the region to implement escrow service, e-contracting, webinar, internet chat and more. Since our launch in Jun, we have crowdfunded ~3M SGD (approx. 2M EUR) in loans to 35 SMEs with 100% repayment. We aspire to be the most trusted P2P lending marketplace in Southeast Asia.

What are the three main advantages for investors?

As investors ourselves, we believe returns, convenience and security are critical. Therefore we offer an alternative investment that gives investors a much better return than traditional fixed income, through the convenience of a fully-online and hassle-free investment approach, with funds handled by a professional escrow agency for security.

What are the three main advantages for borrowers?

Having worked with many SMEs, we find their biggest constraints to be capital, time and energy. Therefore we strive to provide them with capital at competitive rates, fast speed-to-cash and best user experience with minimal effort.

Funding Societies FoundersWhat ROI can investors expect?

We target the SME segment structurally underserved by existing financial institutions. Our interest rates are just a few percent higher than banks’, to minimize adverse selection. We charge 9% to 14% simple interest and pass the full return to investors with only 1% service fee. With diversification, we believe investors can earn at least 7%, much better than deposit interest of 0.05% in Singapore.

How is your company funded?

We began by bootstrapping. Thanks to a talented and committed team, we achieved numerous awards within the first 6 months and received considerable attention from the investor community, including strategic VCs who share the same values with us and now fund us.

 Is the technical platform self-developed?

Yes, we built everything from scratch based on best practices we observed. It took us 95 days from start to launch, thanks to our talented CTO Felix Richard. Our goal is to deliver the best user experience, while ensuring security and scalability. Continue reading

Interview with Eyal Elhayany, CEO of Tarya

What is Tarya about?

TARYA is the largest Israeli P2P lending platform built from the ground up, whose aim is to provide an online (24/7), financially beneficial experience for both borrowers and lenders. At the foundation of the platform is an advanced credit-scoring model relying on big data underwriting algorithms based on fraud prevention procedures

The platform founders have previously worked in both technology and regulation, and observing the state of the economic environment – local and global events and trends, we sense that conditions are ripe for fresh, more beneficial financial offerings to be accepted by the general public.

TARYA is headed by experts in fraud prevention technology and regulation, and has become a major player in the Israeli Crowdfunding transformation in order to supply consumer credit without bias. We are tackling regulatory, business and cultural challenges and – being the leading company – are excited and satisfied of the progress made so far.

What are the three main advantages for investors?

Diversification, diversification and diversification. The key to successful investments in P2P is diversifying the investor’s portfolio by offering:

  1. Automated Investing and Reinvesting – the Investor defines risk and return preferences, while the platforms algorithm allows for a hands-free experience.
  2. Varied borrower types – TARYA continues to develop partnerships with employers and social projects across the nation, thus providing both solid and risky borrowers, from different sectors of the Israeli economy.
  3. Low minimum participation amount in loans – The minimum amount for investing in a loan starts at only 50 NIS (equivalent to 10 Euro).

What are the three main advantages for borrowers?

TARYA being an online financial service, provides borrowers an efficient and up-to-date approach for loan application:

  1. Transparency – The process is performed online, without having to “wait-in-line” at the bank. Payments, interest rates and terms are presented up-front with an emphasis on “consumer protection”.
  2. A FinTech Experience – TARYA is a unique and pioneering initiative that facilitates the direct connection between borrowers and lenders, using an online platform. This platform bypasses existing credit entities – banks and credit card companies, and allows borrowers to obtain credit at significantly lower costs. Interest rates range from 3.5%-8.0% depending on the borrower’s credit rank. Of note, non-banking (credit cards) interest rates for borrowers average 11%.
  3. Business Partnerships – TARYA’s unique model grants upgraded loan terms for borrowers whose personal details are authenticated by their employers. This practice benefits all employees of the organization, who can receive loans at rates above their personal credit rating.

eyal-elhayanyWhat ROI can investors expect?

Lenders investing in diversified and micro-financed portfolios average between 5%-6% returns after fees. Lenders pay a fee of 1.0% on returns.

How did you start Tarya? Is the company funded with venture capital?

We believe the venture has the potential to change the structure of the credit market in Israel: It is widely accepted that the Israeli banking sector is concentrated and not competitive, especially in regard to the household and small businesses sectors. Since setting up shop in May 2014, TARYA has been growing in borrowers, lenders and partner organizations.

TARYA is funded by private equity. Since establishment, we’ve received several applications from VC and institutional investors.

Is the technical platform self-developed?

The platform is developed internally, built from the ground up with underwriting and credit rating processes that combine banking know-how, statistical modeling and technology professionals with extensive expertise in online fraud and information collection from social networks and other sources.

The diverse expertise of our team and the advanced technology is giving us a competitive advantage and will enable us to confront upcoming challenges head on. Continue reading

Fundedbyme Gets Equity Crowdfunding License in Malaysia

fundedbyme-logoSwedish crowdfunding marketplace Fundedbyme today announces that its partner Alix Global Sdn Bhd, was awarded one of six coveted licenses to operate equity crowdfunding in Malaysia. Malaysia is the first South-East Asia country offering equity crowdfunding licenses. The license allows FundedByMe to start operations in the new market.

The announcement follows careful deliberations by the Malaysian Securities Commission, which closed submissions for licenses in May 2015. The license comes under Section 34 of the Capital Markets and Services Act (2007), by the Malaysian Securities Commission. It will permit the selected platforms to help privately owned businesses raise money from a spectrum of investors – including institutional, accredited, and retail investors – with limitations placed on non-accredited investors.

“We’re extremely excited to be one of the few platforms selected by the Malaysian Securities Commission today, which is a first for the region, and marks a historic moment for Malaysia and the crowdfunding industry. As a business-building crowdfunding platform, we together with our partners Alix Global are thrilled to help build this fast-growing industry of which empowers businesses through crowdfunding,” said Daniel Daboczy, CEO and Co-Founder of FundedByMe. Continue reading

3 Marketplaces Join Forces to Form Crowdfunding Alliance in Singapore

Today marks a significant chapter in Singapore’s fast-growing crowdfunding industry, as crowdfunding platforms CoAssets, FundedByMe, and New Union announce an alliance that sees the three platforms combining forces to develop the local and regional crowdfunding industry.

singapore-flagAll three platforms – CoAssets, FundedByMe, and New Union today have international reach of investors and campaigns. Together the alliance recorded over S$200 million dollars raised through crowdfunding campaigns in 2014, with growth expected to accelerate over 2015.

Said Getty Goh, founder and CEO of CoAssets, “As an individual company, there is only so much we can do. Hence, I am excited and honored to be a part of this three-way alliance. However, this is just a first step and we hope that more stakeholders will join this alliance so that it can eventually pave the way for Fintech trade association. As Fintech is a burgeoning sector, the best way forward is to come together and engage the authorities collectively. Akin to the Singapore Venture Capitalist and Private Equity Association (SVCA) or Real Estate Developers Association of Singapore (REDAS), having a Fintech association is not only a good way to promote self-governance, it can also bring greater awareness to what this industry is all about.”

“We are excited about this development with likeminded partners in the industry. There’s so much more we can do together, once we focus on developing the market here and globally in 2015. Crowdfunding is definitely on an uptrend –– we experienced over 600% growth in 2014 year-on-year –– and expect that the next wave of growth will exponential especially considering this alliance, coupled with surging Asian demand,” said Daniel Daboczy, founder and CEO of FundedByMe.

“Technology and the world-wide-web have become irreplaceable to our daily life, and every day business — and today, this alliance represents the emerging wave of financial services that meet crucial needs in the business community. Our commitment is to work closely with government agencies and financial institutions to spearhead a progressive and trustworthy crowdfunding environment,” Jeremiah Lee, Founder and Managing Director of New Union.

The three platforms plan to launch their first combined crowdfunding project in Q3 of this year, as well as joint conferences over the months following their alliance announcement. Continue reading

Milaap Raises 1.1M US$

P2P microfinance service Milaap (see earlier coverage on P2P-Banking.com) raised 1.1 million US$ from Jungle Ventures (Singapore), Toivo Annus,Lionrock Capital, Jayesh Parekh and Unitus Seed Fund. The current round of funds will be utilized to expand engineering and marketing investments for enhancing the online product experience, and to invest in scaling up marketing and outreach efforts.

Milaap says that so far 100% of the microfinance loans originated have been paid back.