Dec 20, 2013 05:08 PM

Organization of Firms in P2P Lending Publishes Standards for Entering Industry

(Beijing) – An organization of companies involved in peer-to-peer lending and information providers has published a set of standards that mark an attempt to set requirements for establishing P2P firms.

The requirements cover a range of items, from the credentials of employees and a company's information disclosure to risk controls and the use and custody of client money.

It was important to introduce the requirements because the lack of proper market entry threshold was why so many P2P companies are failing, said Wang Zhengyu, a manager of the Union of Shanghai Internet Lending Services Enterprises, the organization that published the standards on December 18.

The original idea for P2P websites was that they were only a platform to match people with spare cash with those who need to borrow money. A typical transaction could see someone lend 5,000 yuan to a young couple wanting to decorate their new home.

The practice started to take off in the country in 2009. It is unclear how big it has grown, but a source at a regulatory agency has said it could be worth about 60 billion yuan.

The document published by the union defines P2P companies as "intermediaries serving lenders and borrowers in exchange for a commission." It limits their services to information dissemination, risk assessment, credit advice and transactions management. That means P2P companies cannot use their own money for lending.

It also stipulates that "the company must establish a system to separate proprietary capital from lenders' money," and that "loaned funds must be managed by a third-party." It goes on to say that a company "must not in any way appropriate the lenders' money."

A typical loan arranged by a P2P company most likely would not violate any of the requirements, but it there have been reports this year that many firms had started engaging in risky operations. Some companies have been criticized for activities that bordered on illegal fundraising.

From the beginning of September to the end of November, more than 40 P2P companies either closed or had major problems repaying debt, Wang said.

The central bank has repeatedly warned about the risk involved with P2P lending and has urged local authorities to strengthen their supervision. It recently explained the ways some P2P firms were involved in illegal fundraising. One of those was essentially a Ponzi scheme.

But the bank is not in a position to regulate the industry, Wang said, nor is any other financial regulator in position to draw up any binding rules for the business any time soon.

The union's standards may help to keep out unfit companies and serve as a reference to gauge those already practicing, said Ma Haiyong, secretary-general of the Shanghai Information Services Association (SISA), which founded the union and supervises it.

For now, the standards apply to only members of the union, which includes 13 P2P lending companies and several information providers. Those that do not meet the standards will have a grace period to do so, an official with SISA said. Failure to comply after that may lead to expulsion from the union and bad publicity, he said.

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