The FAQ is based on a set of amendments that are explained here: http://sdj-thefineprint.blogspot.co.uk/2012/06/innovation-meets-financial-services.html

1. FAQ ON PROPOSED AMENDMENTS TO THE FINANCIAL SERVICES BILL 1
What amendments have you proposed?
To promote effective competition in the interests of consumers and small businesses in the
regulated financial markets, the new Financial Conduct Authority should:
1. Consider developments in the markets for unregulated financial services that are in the interests
of consumers and businesses; and
2. Establish a new authorisation regime for direct finance platform providers.
A direct finance platform is an electronic system which brings together multiple participants, the
majority of whom are consumers and/or small businesses, for the purpose of agreeing certain
bilateral finance arrangements. These would include peer-to-peer arrangements for loans, shares in
companies, debentures, prepayment of trade invoices, donations and currency transactions.
Why are the amendments important?
Our regulated financial system is failing to enable the cost efficient flow of surplus funds from
ordinary savers and investors to creditworthy people and businesses who need finance. It is
estimated that small businesses face a funding gap of up to £59bn over the next 5 years, within an
overall finance gap of up to £190bn for UK business sector as a whole. 2 There is insufficient
competition in the markets for consumer and business finance, and it is vital that we find ways to
encourage innovation and competition and new entrants to these markets. 3
Yet our regulatory authorities are only empowered to promote competition amongst regulated
firms. As a result, emerging peer-to-peer models that reflect wider trends in other retail sectors do
not fit neatly within the existing regulatory framework. 4 Entrepreneurs complain that the process of
launching and developing new finance platforms has been overly complicated and expensive.
1
Briefing paper prepared by Simon Deane-Johns, Consultant Solicitor, Keystone Law (with the assistance of
Tony Watts of Keystone Law where noted in the Schedule of Amendments):
http://www.slideshare.net/Pragmatist/proposed-amendments-to-the-financial-services-bill-sdj-21-06-12
2
Boosting Finance Options For Business: http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-
boosting-finance-options-for-business.pdf
3
Boosting Finance Options For Business: http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-
boosting-finance-options-for-business.pdf; “Towards a Common Financial Language”, a speech by Mr Andrew
G Haldane, Executive Director, Financial Stability, Bank of England: http://www.bis.org/review/r120315g.pdf;
Report of Lord Young to the Prime Minister of May 2012 “Make Business your Business: Supporting the Start-
up and development of Small Business” in which many of the platforms referred to in Annex 1 of this Report
are referred to with approval:
http://www.startupbritain.org/resource/binary/userfiles/Make_Business_Your_Business_2.pdf)
4
Andrew Haldane, Executive Director, Financial Stability, Bank of England has said: “Commercial peer-to-peer
lending, using the web as a conduit, is an emerging business. For example, in the UK companies such as Zopa,
Funding Circle and Crowdcube are developing this model. At present, these companies are tiny. But so, a
decade and a half ago, was Google. If eBay can solve the lemons problem in the second-hand sales market, it
can be done in the market for loans. With open access to borrower information, held centrally and virtually,
there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in
time become the surplus links in the chain. Where music and publishing have led, finance could follow. An
information web, linked by a common language, makes that disintermediated model of finance a more
realistic possibility. “Towards a Common Financial Language”: http://www.bis.org/review/r120315g.pdf;

2. Investors are confused about whether they are acting unlawfully when using some platforms.
Coupled with distorted personal tax incentives, the regulatory framework discourages ordinary
investors from diversifying beyond regulated investment products.
Together, these factors contribute to the erosion of UK investors’ long term financial security, the
distortion of the markets for both regulated and unregulated financial services, and further inhibit
innovation and competition in the markets for retail financial services. In these circumstances, it is
unrealistic to assume that new business models will thrive without some alteration to the regulatory
framework.
What impact would the amendments have?
These amendments should open up existing retail finance markets to greater competition by
encouraging transparent new services to emerge and grow more quickly. Proportionately regulating
the operation of direct finance platforms reflects the carve-out of low risk payment services from
the historic ‘banking monopoly’. 5 Regulating activities at the platform level will also:
• Enable economies of scale and consistent ‘best practice’ in the management of operational risks
that are common to all platforms; and
• Remove the need to treat participants on direct finance platforms as if they are operating a
‘business’, since the platform itself will meet all the compliance requirements for a business of
that kind.
The background to the peer-to-peer lending element of the Bill
Peer-to-peer platform operators have openly invited the government to establish definitive routes
to market for direct finance platforms. 6 Three firms established the Peer-to-Peer Finance Association
to promote a set of Operating Principles as a framework for controlling operational risks that are
common to all platforms. 7 This self-regulatory initiative was welcomed by the government in its
response to the report of the Breedon Taskforce as helping “raise awareness among SMEs and
investors and establish industry standards to protect investors and borrowers. 8 Yet the regulatory
framework itself has not evolved in line with these developments, and the Financial Services Bill has
so far failed to support any of these objectives. As such, the Bill misses an opportunity to establish a
sound foundation for the future regulation of financial services. 9
5
Implemented in the UK via the Payment Services Regulations 2009 and the Electronic Money Regulations
2011.
6
Boosting Finance Options For Business: http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-
boosting-finance-options-for-business.pdf;
http://www.redtapechallenge.cabinetoffice.gov.uk/themehome/disruptive-business-model/
7
http://www.p2pfinanceassociation.org.uk/
8
Boosting Finance Options For Business: Government Response to the Industry Taskforce:
http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-669-boosting-finance-options-government-
response.pdf
9
It is also in contrast to the situation in the USA, where the JOBS Act has recently introduced a proportionate
regime for securities crowdfunding platforms – see “Implementing the JOBS Act in the UK” prepared by Tony
Watts of Keystone Law.