An arm of the China Banking and Insurance Regulatory Commission has introduced 108 nation-wide compliance criteria for peer-to-peer electronic marketplaces. The P2P Office, officially called the China National Online Lending Regulatory Office, published its rules on Friday.
The extensive regulations follow a broader crackdown on the unruly P2P lending industry in the wake of fraud and bad practices. The P2P industry is consolidating fast.
According to P2P media Wangdaizhijia’s statistics, 247 P2P lenders saw corporate defaults in June and July. Up to July, 2,305 platforms were found to have certain kinds of problems. The number of operating P2P platforms has shrunk from 3383 to 1,645 since 2016, with many succumbing to lack of liquidity, poor risk controls, vague regulation and mass defaults by borrowers.
The P2P Office's new standards are aimed to give the surviving players a set of tough requirements and best practices, defining how the industry will behave from now on.
Dong Jun, founder of Jimu, one of the bigger P2P platforms in China, says this national version of measures, backed up with clear timeframes, is more practical than previous attempts at regulation, as it prevents rules been misunderstood or reinterpreted by regional governments.
“These principles have always been the bottom lines of our industry,” he said. “These new rules will certainly filter out dodgy actors.”
These new rules will certainly filter out dodgy actors
The shakeout has seen many investors lose money, to such a scale that it has threatened social stability, sparking victims in many cities to stage protests. From a regulatory point of view, a crackdown isn't enough. The industry has to find a new footing.
“If you ask me what has been missing in P2P, investors’ money is already missing,” said David Yin, vice president at Moody’s Investors Service. “This is the most comprehensive set of queries for P2P so far.”
The new regulations first set out rules for companies to “self-review”, but they’re not leaving regulation to industry players. A matrix of local industry associations and the National Internet Finance Association are being mandated with inspection powers, and the penalty for being caught lying to auditors is the closure of the business.
The second thing these rules do is define more explicitly what P2P platforms can and can’t do, a big contrast to the freewheeling birth of the industry.
Some notable measures include defining P2Ps as intermediaries of information but not of credit. This is intended to ban platforms from using their own goodwill or reputation to enhance the credit profile of borrowers. Platforms may have done this to either get fees from borrowers or to make their investment opportunities look more attractive or safer. Now, however, borrowers must stand on their own, giving lenders a purer view of the business.
What has been missing in P2P, investors’ money is already missing
In a similar vein, platforms can’t fund the business through separate capital pools – they need to rely on attracting actual investors to buy loans. The new rules also set out platform’s disclosure and reporting duties.
Finally, they are meant to be implemented nationally. “These measures could be important standards for the P2P industry, because a national standard will leave no room for arbitrage,” said Yin.
What about the missing millions?
What the rules don’t clarify: the fate of platforms that have already gone bust, and whether or how to recover some of the lost assets.
There have been rumours that the country’s big asset management companies, created in the wake of the Asian financial crisis to absorb banks’ bad loans, could step in. But their current charters don’t let them acquire personal assets, as P2P networks didn’t exist in the late 1990s.
The AMCs or other entity could perhaps take on a custodial role by taking over companies that still legally exist, in order to dispose of their assets and repay their debts, but this wouldn’t do much for those companies that have completely dissolved.
What the new regulations achieve is create a high bar for any company that wants to do P2P lending – or perhaps a 108-brick wall is a better metaphor. Regulators are no longer willing to tolerate risk in the sector, which is not considered strategic to the government’s view of the economy.
The big players left standing will face high compliance-related costs, but this will also serve as a barrier to new competition, leaving executives ready to accept the new burdens.
“Based on the distinct nature of P2P, a certain amount of compliance cost to guarantee a ‘good money’ market is worthwhile,” said Dong at Jimu.
What the survivors can’t tell yet, though, is the exact impact on a company’s revenue and funding.
“It’s hard to measure how much is the loss,” Dong said.