This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 18 - 24, 2016.
Investors can look forward to a new investment channel soon with the launch of the new regulatory framework for peer-to-peer (P2P) financing by the Securities Commission (SC) Malaysia on April 13. The framework will be the first of its kind in the region.
In a press release, SC says the framework will enable sole proprietorships, partnerships, incorporated limited liability partnerships, private limited and unlisted public companies to access market-based financing to fund their projects or businesses. Those who invest would be buying securities in the form of an investment note or Islamic investment note that is issued by the business. In return, the issuer is obligated to pay investors interest or a profit over a specified time period. While there is no fixed tenure for the investment note, it is expected to range between six months and two years.
In a recent technical briefing with the media, it was said that issuers will comprise only locally incorporated start-up companies as well as small and medium enterprises that are seeking financing. No personal loans are allowed under this framework and there are no plans to introduce them at this point.
Under the framework, the rate of financing must not be more than 18% per annum. Any higher rate would require prior consultation with the SC. Issuers are not allowed to seek financing for the same purpose on multiple P2P platforms. There is no cap on the funding sought and issuers must raise at least 80% of the target amount before they are allowed to access the monies raised. Issuers are not allowed to retain funds that exceed the initial target amount. This is because it would go against the risk scoring assessment that determines the amount issuers are eligible to raise and their repayment capabilities. For example, if an issuer is eligible to raise RM100,000 but receives RM120,000, he can only access RM100,000. Extra monies will be returned or rejected by the operator, subject to the rules of the individual operators.
The P2P platforms will be open to angel, sophisticated and retail investors. There is no investment limit for them, although the regulator encourages retail investors to limit their investments to RM50,000 at any given time. The regulator will not impose any cooling-off period for investments made on these platforms, but said it is up to the discretion of the individual operators to provide it should they wish to do so.
P2P operators must register with the SC as a recognised market operator and have a minimum RM5 million paid-up capital. The operator will conduct background checks and give risk scoring assessments of the issuers, which must be disclosed to investors. It will evaluate the issuer’s credit history and capacity to repay. This will allow it to assess and assign a risk score to the investment note or Islamic investment note. On its platforms, the operator must disclose information relating to the issuers, risk scoring mechanism, methodology and parameters adopted by the P2P operator.
The risk scoring mechanism will be determined by the individual operators and is expected to be similar to how bond credit rating agencies assess debt issuances. Its default criteria, default management and statistics on late payment or default rate of issuers must also be clearly stated on the platform, as well as information on processes or arrangement in the event the operator is unable to continue its operations.
Operators must also provide relevant information on the issuers to potential and existing investors, such as key characteristics of the issuers, purpose of the fundraising, its business plan and financial information. This information will be published on the platforms. It must also disclose fees, charges and other expenses relating to the platforms.
To enhance protection for investors, a P2P operator has to ensure that monies obtained from investors are placed in a trust account until the minimum target amount is met. The operator is also obliged to place the investors’ monies in a trust account when an issuer makes repayments to the investor. In the event that there is a payment delay or a default, the onus is on the operator to make the effort to recover the outstanding amount. If that fails, the investor has direct recourse against the issuer and can take legal action under civil law as a creditor.
The framework details requirements for the registration of a P2P platform, as provided in the amended Guidelines on Recognised Markets. The SC said the new Chapter 13 in the guidelines lists the duties and responsibilities of a P2P operator, type of issuer and investor who can participate in the P2P.
The regulator invites applications from May 2 to July 1 from those who are interested in operating a P2P platform. The platform operators are required to be locally incorporated. Approved operators will be expected to kick off their platforms by early next year.
The introduction of the P2P framework is in line with the government’s agenda for financial inclusion and to promote development of the SME market as well as promote innovation through crowdfunding of ideas and new businesses.
Like equity crowdfunding, the P2P financing framework is the first of its kind in the region. P2P operators in neighbouring countries like Singapore and Hong Kong are only required to apply for a licence and are not governed by a detailed framework.
With the framework, Malaysia joins the rapidly growing global peer-to-peer lending market. According to the PWC report on “Peer Pressure: Peer-to-Peer Lending Platforms are Transforming the Consumer Lending Industry” released in February last year, US P2P platforms issued an astounding US$5.5 billion in loans in 2014. PWC has forecast that the market will grow to US$150 billion by 2025. In September last year, a study by payments company Fiserv and the Centre for Economics and Business Research found that peer-to-peer business loans will hit £12.3 billion by 2020, a tenfold increase from the £1.2 billion lent in 2014. In February, the Financial Times reported that growth in China’s P2P lending market climbed to RMB982 billion, from RMB253 billion in 2014.