ASIC surveys highlight continued growth in innovative funding platforms

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Recent surveys of market sectors supported through ASIC’s Innovation Hub shows fintech businesses are continuing to see growth in demand for alternative funding sources.

ASIC’s Innovation Hub exists to foster innovation that could benefit consumers by helping Australian fintech startups navigate our regulatory system.  Marketplace lending (also known as peer-to-peer lending) and crowd-sourced funding (CSF) are two examples of such fintech business models. Marketplace lending offers an alternate source of funding for investors and borrowers, while CSF offers a different form of capital raising for new and smaller companies.

ASIC recently conducted its third survey of the marketplace lending industry and its first survey of Australia’s crowd-sourced funding (CSF) sector.  These surveys track the growth and development of these sectors.

ASIC Commissioner Danielle Press said, ‘The surveys help ASIC better understand the make-up of these developing sectors and how ASIC can facilitate their growth while at the same time, managing any regulatory risks they pose compared with more traditional lending and fundraising approaches.

‘Marketplace lending is more established in the Australian market than crowd-sourced funding. While our most recent survey results show ongoing growth in both borrowing and lending activity in the marketplace lending sector, there are some indications that this growth may be moderating.

‘Conversely, the crowd-sourced funding industry is in its early stages and is expected to grow further with the recent expansion of the crowd-sourced funding regime to proprietary companies.

‘These “snapshot” surveys also help ASIC assess whether advancements in technology are delivering benefits to consumers and also whether they are creating new risks in lending and fundraising.

‘ASIC will continue to monitor developments in the marketplace lending and crowd-sourced funding sectors. We are committed to facilitating innovation while ensuring investor trust and confidence is maintained, and “disruptors” to the market are held to the same standards as more traditional players,’ Ms Press said.

Marketplace lending

Marketplace lending involves the use of electronic platforms to match investing lenders with borrowers.

Report 617 Survey of marketplace lending providers:2017-18 (REP 617)summarises ASIC’s findings from the 2017-18 marketplace lending industry survey, which was conducted between July and October 2018.

The survey covers marketplace lending activities that are regulated by ASIC as managed investment schemes and looks at providers offering financial products or services through a ‘scheme of arrangement’ that matches loan requests against offers to invest. The findings are based on responses from 10 trustees in relation to 13 platforms. These platforms are managed by 10 operators that are separate entities to the trustees.

During the 2017-18 financial year, marketplace lending investment and borrowing continued to grow. New borrowing increased 45 per cent to $433 million, and outstanding loans were up 59 per cent to $518 million.

Respondents reported a total of 13,446 investors and 31,421 borrowers as at 30 June 2018. Although these numbers have increased significantly since 2016-17, they still represent a slowing down in the rate of investor and borrower growth. In 2017-18, a total of $352 million was invested in the platforms surveyed.

Two platforms control close to 80 per cent of sector funds under management. This level of concentration was slightly down from 2016-17.

Rates of default have increased moderately to 2.9 per cent of total loan value from 2.3 per cent of total loan value in 2016-17. 

Crowd-sourced funding

CSF is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that each invest small amounts of money, without the regulatory burden of traditional fundraising.

The findings of ASIC’s first report on Australia’s CSF sector are summarised in Report 616 Survey of crowd-sourced funding intermediaries: 2017-18 (REP 616)and covers the first six months of CSF activity in Australia – from 11 January to 30 June 2018.

During the survey period, there were 14 CSF offers, half of which were successful or ‘complete’ and half of which were ‘incomplete’.

The survey found that, complete CSF offers raised a net total of approximately $7.04 million during the survey period.

For complete offers, the majority of funds (77.5%) raised were from retail investors. Of the 17,457 investors in complete offers, nearly all (99.4%) were retail investors.

There were 439 investors in incomplete offers. Incomplete offers raised a net total of approximately $872,000 and the amounts raised were returned to investors when the offer failed to complete.

ASIC conducted its first survey of the CSF sector by collecting data from CSF intermediaries in respect of the 2017-18 financial year. During this period, fundraising through CSF was only available to some public companies. The scope of CSF fundraising increased to include proprietary companies following amendments to the Corporations Act 2001, which took effect on 19 October 2018 (18-314MR).

On 30 June 2018, at the end of the survey period, there were eight licensed CSF intermediaries. This figure has since grown to 16 licensed CSF intermediaries.

Background

Marketplace lending

Marketplace lending does not have a stand-alone regulatory regime in Australia. The regulations that apply to marketplace lending depend on the structure of the business, the kinds of financial services and products being offered, and the types of investors and borrowers involved.

In most cases, the provision of marketplace lending involves the operation of a managed investment scheme, which requires the provider to hold an Australian financial services licence. Where the loans made through the platform are consumer loans (i.e. loans to individuals for domestic, personal or household purposes), an Australian credit licence is also required.

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Crowd-sourced funding

The CSF framework was established in Australia on 29 September 2017 when the Corporations Amendment (Crowd-sourced Funding) Act 2017 took effect and amended the Corporations Act.

Report 616 covers CSF activity from 11 January 2018 because ASIC granted the first Australian financial services licences to CSF intermediaries on this date. The intention of the CSF regime was to provide an alternate means of raising funds for smaller companies and to enable investors to ‘crowd fund’ with appropriate investor protections in place.

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