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Challenges remain before P2P comes clean
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AFTER eight years of free run that led to a series of scams in the booming online peer-to-peer (P2P) lending platforms, the central government has now come up with a series of draft regulations as it works to regulate the booming industry.
But analysts said massive challenges remain before the industry is wiped clean of all its wrongdoings.
On December 28, the government announced draft regulations to monitor the sector in which the online lenders had ballooned, bringing with them risks and defaults. The move followed a series of investigations into websites that link investors with borrowers.
One of the cases involved Ezubao, which claimed to be an online P2P platform with TV commercials promoting it on several national channels. It is now under investigation for illegally raising 72.6 billion yuan (US$11.14 billion) from investors.
In another case, Dada Group, a platform that played Ponzi scheme to raise money from investors, reportedly forced employees to buy its own financial products.
According to Shanghai-based researcher Yingcan Group, P2P lending platforms sold a record 982.3 billion yuan of financial products through 2015, a staggering 28.6 percent jump from just a year earlier.
Investors flock to these platforms in the hopes of higher returns than bank deposits as well as easier access to loans than banks that check credit records.
The draft was seeking a ban on 12 fronts, including selling wealth-management products, funds, insurance and trust products that can be bought at traditional financial institutions, raising funds of their own to lend out, crowd funding and guaranteeing returns.
The draft envisages that a P2P platform should be “limited to roles as intermediaries between lenders and borrowers.” It will also require platforms’ operators to register with local financial regulatory bodies, enhance information disclosure and get banks involved to safeguard investors’ funds.
Understandably, not everyone associated with the industry are happy with the latest developments.
“The rules are quite strict,” Shanghai-based Maizi Financial Services, which operates a P2P site and other investment platforms, said in a statement. “The industry’s hope of upgrading itself with wealth management products and adopting a diversified business model is completely dashed.”
But other market watchers said the new rules will “cleanse the industry and make it more healthy,” claiming that as much as one-third of the total 3,858 platforms were involved in fraud or were having difficulties withdrawing funds by 2015, according to Online Lending House.
“There was a need for a detailed regulation for a long time,” said Xu Hongwei, CEO of Online Lending House, a portal site that tracks the sector. “We need a standard to prevent good money from being chased out by the bad.”
Industry officials were, however, of the view that while the rules will boost development in the long term, it was unlikely to solve all the problems immediately. One of the toughest tasks involved education for investors.
Under the regulations, P2P firms will be banned from making decisions for investors and should only act as information brokers. That could be a potential source of conflict between users’ habits and market rules.
In common practice, P2P platforms recommend certain products that match customers’ requirements of annual returns or periods. Under the new law, that would be deemed illegal.
“Risks would be left to investors directly,” said Guo Yuhang, co-founder of a Shanghai-based P2P firm Dianrong.com that raised US$207 million in the latest round of financing in August.
“But Chinese P2P investors don’t have enough risk control experience. It will take a lot of time for them to be educated by regulators and firms,” Guo said.
Zhu Ning, deputy dean of Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, echoed the dilemma as seen in the Ezubao’s case: “If individual investors suffer too many losses, they may express their anger through all channels, which may threaten social stability.”
The top priority of P2P platforms to stay healthy and sound, and risk-free has not been clearly addresses under the current draft, analyst said.
“Asking P2P platforms to use banks for transactions is a good step that will help government bureaus to get better control of the capital traffic,” according to Rong360, a third-party online finance platform based in Beijing.
“But it’s far from enough.”
Banks can check and control information such as identification of accounts and trade records but they can hardly evaluate core information like the authenticity of a financing project or transaction.
Banking sources told Shanghai Daily that labor costs were higher than what P2P firms offered, and some banks also lack professional certification and risk control staff.
Risks are also accumulated in the inner side, analysts said, which need a tracking system to monitor and flag risks before another fraud case similar to Ezubao pops up. This top-level design was missing in the draft as well.
“The biggest challenge for P2P sectors is how to chase its rapid development with proper checks and regulations,” Eric Young, a partner in Ernst & Young’s Fraud Investigation and Dispute Services, told Shanghai Daily.
“Most platforms had started to learn about risk control of their loans but hadn’t realized that their staff’s behavior needs control as well just like in a bank. How does one analyze the big information pool of inner mails and files which is just as important as digging information from borrowers and lenders.”
The draft rules were released jointly by the China Banking Regulatory Commission, which oversees the sector, the Ministry of Public Security and the State Internet Information Office. It is currently accepting feedback from the public about the rules until January 27.
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