Regulation of p2p loans with focus on the Baltics

The p2p market is relatively young, the first continental European platforms started back in 2008. New business ideas often are that new, no regulations and laws are in place. In this setup the regulator and the marketplaces need to work together to creating a framework which is compatible with the current legislation. This is partially a long process which needs an open mind from both parties. Sometimes these new business practices contradict to the legislation in place and it is not possible to make both compatible. This happened in the case of Lenndy, a Lithunian marketplace, which did not receive a definitive licence to operate from the Lithunian Centralbank (they operated under a provisional licence until then). The problem was that in Lithunia only “real” p2p lending (= borrower and investor meet directly through a marketplace) and crowdfunding are allowed. The whole buyback stories, where securitized (= already issued loans) are sold to investors was prohibited by the Lithuanian Centralbank. So we take a look at Latvia (where to Lenndy migrated).

Latvia, hotspot for p2p marketplaces

It’s no secret that mostly buyback platforms have settled in Latvia. The current regulation there is mostly ok (for the moment) with this form of financing. The regulator has a close eye on that sector and has sometimes a say. Have you asked yourself why Mintos for example amends its contracts, mostly the Latvian’s, from time to time? That’s the reason. It is a myth that there is no regulation of the p2p sector in Latvia. It is rather the case that there are provisional legislations which are not binding to date.

The regulator asks the marketplaces for even more things and is not stringent (and sometimes contradictive) in its claims (according to a lawyer I know). This results in a more or less chaotic environment where the marketplaces have to maneuver. Most of the platforms will in the end get a definitive licence in Latvia, as they can afford the manpower for dealing with legislation. It comes as no surprise that since spring 2017 only one new platform stepped on to the Latvian carpet: Peerberry. This is the platform of Lithunian loan originator Aventus Group. They seem to be confident to be able to fulfill the regulatory requirements.

These platforms operate in a grey area of regulation and there can always be the case that there will be a court ruling, which forces marketplaces to take certain measurements. It has happened in August for example, when all hipocredit loans where bought back from one day to the other. There were speculations that only good performing loans were bought back etc. Fact is that at that point of time a Latvian court ruled that selling private debts to private investors is illegal in Latvia. This case came up due to questions of the banking regulator and the consumer finance protection organization. As per a similar reason the Latvian Mogo loan contracts were restructured. The Latvian court rulings affect only Latvian loans and originators who offer loans in the country. Other regions are not affected by the Latvian rulings. Changes in legislation in Georgia led Mintos to change the structure as well (respectively the loan originators). Per January 1st 2018 the regulation in part of the consumer loan sector changes, so here as well some measurements must be taken. You see, there will come a lot of work for the p2p platforms. I do not want to create any fear with this post, but I think we as investors should be aware of the circumstances in the markets we invest. It is pretty normal if you open up new business fields that the regulator comes and wants to fulfill its assignment. Regulation in an adequate doses is beneficial for all parties!

Estonia, the next destination?

In the Baltics, there is only Estonia left which is home to some p2p Marketplaces already. Especially crowd investing platforms from the real estate sector are already there, like Estateguru, Crowdestate and Bulkestate (which was founded in Latvia, but moved to Estonia due to a better regulatory environment for real estate platforms). But there are more examples which offer real p2p: Investly, Monestro, Bondora and Omahara (there are few more). What was missing were the buyback platforms.

Latvian buyback platforms tried during Summer to get in contact with the Estonian Regulator to discuss scenarios under which they could relocate to Estonia. The Estonians blocked though, as per Estonian Law a marketplace (like Mintos, Swaper, Twino, Viventor etc) must not belong directly or indirectly to a loan originator. This is why their plan was relinquished.

Buyback platforms exist despite this law in Estonia (at least one): Die Iuvo Group (moved from Bulgaria to Estonia) is located in Estonia and possesses the needed licenses (financial company und payment agent) to operate in Estonia. I don’t know how the setup is with Iuvo to make it work in Estonia, but it works 😉 I know that there is one platform from Latvia which will announce its move to Estonia shortly as well. It seems there are ways for buyback platforms to get established and operational within Estonian boarders.

The case of withheld interest

What since last summer is courant normale in Lithunia, is only practised in Latvia by ViaInvest: Withheld interest. One can ask here: Why does ViaInvest do that and other marketplaces not? The situation in Lithunia is clear (although there seems to be a free threshold of EUR 500 from 2018 on): Interest received by non Lithunia residents are subject to a partial withholding tax. The Lithunian Centralbank has decided in that way. What about Latvia? For Latvia as well a withholding tax should be applied to foreign investors, but it seems to be only a provisional rule and marketplaces are not obliged to follow at the moment (according to the info I got from my known lawyer). At least the marketplaces see it that way, although the authorities might have a different opinion. As long as there is no definitive ruling in that matter the platforms will continue as did (ask for certificate of tax residency, withhold taxes on Polish loans, or nothing at all). According to my contact only ViaInvest is dealing the right way with the withholding tax. I guess we will therefor see other platforms to play along and ask for certificates at least. Just for your info to be prepared (and not surprised ;)).

Conclusion

You see, there is a lot going on in the p2p sector. As time passes by the platforms and the authorities will settle their differences. Until then, it will be interesting.

If you would like to discuss this issues, just post a comment.

2 Replies to “Regulation of p2p loans with focus on the Baltics”

    1. They are regulated in Estonia, this is no issue. I would not recommend to invest atm due to high arrears and possibly defaults rate. I have no clear picture on recovery figures atm

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