P2P online lending emerged in China around 2007 to ease difficulties that small and micro enterprises, as well as individuals, faced in getting loans. From 2013, P2P lending has enjoyed explosive growth, going from a dozen to several thousand in a year. In the absence of regulations, such explosive growth sowed the seeds for future risks. According to incomplete statistics, in 2014, the criminal offences, the amount of money involved and the number of victims, in terms of illegal fundraising involving P2P online lenders, rose 11, 16 and 39 times the levels in 2013, respectively.
Due to a range of complex internal and external factors, such as the macroeconomic environment and deleveraging, liquidity tends to be tense, and capital chain breaks are speeding up in the P2P field, resulting in the widespread collapse of these platforms. This article presents a brief analysis of the status quo, main business model and existing issues of P2P online lending.
Existing P2P platforms and operating status. According to statistics from WDZJ and the Evergrande Research Institute, there were 5,970 P2P platforms as of the end of 2017, about nine times the number in 2013. With the recent launch of intense regulatory measures, fewer than 2,000 P2P platforms remained as of August 2018.
According to the 01 Think Tank’s latest Monthly Report on P2P Online Lending in August 2018, the total turnover of the P2P online lending sector stood at RMB7.33 trillion as of end-August 2018, with the August turnover at RMB87.4 billion, down 65.33% year on year and 29.29% month on month. At the end of August 2018, the outstanding balance in the P2P sector stood at RMB866.5 billion, down 30.4% YoY and 4.57% MoM, declining for the 11th consecutive month.
Current regulatory situation of P2P platforms. After probing for nearly two years, the regulatory authorities have acquired a preliminary understanding of the basic conditions of P2P platforms and promulgated a series of regulatory ordinances. In 2017, a regulatory scheme on online lending, called “1+3 policy framework”, comprising “the one Measure, two Guidelines and one disclosure standard”, had been put together.
In addition, regulatory authorities promulgated other regulatory ordinances. In August 2018, for example, the Leadership Office on Special Regulation of Risks in P2P Online Lending issued a notice, Carrying out Inspection on Compliance of P2P Online Lenders, and also promulgated a checklist for Compliance Issues of Online Lending Information Agencies (referred to as Online Lending 108 in the sector). Meanwhile, it was required that the inspection be completed by December this year.
So far, about 20 provinces, municipalities or cities, and regions, including Beijing, Shanghai, Guangzhou and Shenzhen, have promulgated detailed administrative measures for filing registration and work forms to rectify acceptance, further refining the work plans and processes, forming a layered regulatory framework, namely provisions at ministerial and commission levels and provisions at the level of local financial regulatory authorities.
BUSINESS MODEL AND ISSUES
Business models. The business models of P2P platforms can be summarized into one or a combination of the following: Financial information agencies; cash pooling; self-financing or self-financing in a disguised form; direct lending to borrowers in the name of the platform; provision of guarantee for the borrower; issuance of financial products, such as wealth-management products; distribution of wealth-management products; creditor’s rights transfer (one to one, one to multiple or multiple to multiple); bundled sales of commodities, other financial products and services; engaged in businesses resembling asset-backed securitization; crowdfunding. Given limitations of the article size, we will not elaborate on these business models.
Existing issues. According to Online Lending 108, issues involving the operation of P2P platforms include:
(1) Engagement in operations beyond the business range of an information agency, such as credit agency activities, provision of guarantee or principal/interest payment assurance for the lender in direct or disguised forms, which constitutes rigid repayment to the lender;
(2) establishment of cash pools against rules;
(3) self-financing in direct or disguised forms;
(4) making up financing targets, or provision of information agency services for non-compliant financing targets;
(5) operations similar to asset-backed securitization in violation of rules;
(6) failure to fulfil the obligation of protecting the lender by alerting the lender about risks, conducting due-diligence investigations or carrying out hierarchical management;
(7) failure to fulfil the obligation of protecting the borrower by alerting the party about the risks and conducting due-diligence investigations;
(8) failure to adhere to the principles of low value and dispersiveness for online lending, resulting in risk concentration;
(9) issuance of wealth-management products in violation of rules to raise funds (or issuance of wealth-management products through an associate entity);
(10) non-compliant promotional practice, or enticing lenders or investors with principal/interest assurance or high earning rates.
The identification of problems is just the beginning, while their classification and resolution are the goal. Based on the problems identified, platforms against the laws should be firmly banned, and platforms against regulations should embark on timely rectifications, while lawful and compliant platforms should be encouraged and supported, so that P2P platforms, as a neutral Internet tool, can play a positive role in meeting the investment/financing demand of small and micro businesses, as well as individuals.
Meanwhile, pursuant to regulations, shareholders also need to make a commitment to lawful and compliant operations of the platforms during their rectification, which will cause a dilemma between sustainable operation of the platform and potential joint responsibility and risks to the shareholders.
We will propose constructive solutions to the handling of problematic platforms and how shareholders can avoid incurring legal responsibility during the above processes, based on practical experiences.
Zhang Wenliang is a partner and Yuan Haibo is an associate at Merits & Tree Law Offices
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