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Financial markets worldwide are changing rapidly, offering their customers a growing range of new services. In such a situation, financial market supervisors should be vigilant and development-oriented, as the protection of financial sector customers and the promotion of understandable operational models of market participants are important functions of supervisors. One of the fast-growing segments is peer-to-peer platforms.
This year, the Financial and Capital Market Commission (FCMC) issued four operating licences to investment firms that so far had positioned themselves as peer-to-peer platforms. The licence was obtained by AS Mintos Marketplace, which is the largest company in Europe, AS TWINO Investments, SIA “DN Operator” and SIA “Viainvest”. Prior to obtaining the licence, these companies were engaged in commercial business activities related to the marketing of credit claims issued by credit providers on the web platforms, offering investments in loans. Following the granting of the FCMC licence, companies are granted a transitional period during which they discontinue offering investments in loans and start offering investors financial instruments, debt securities based on loans issued by credit providers.
In Europe, there is no single framework for this market segment. Countries take different approaches. One of them focuses on a clear and transparent business model, when issuing licences and monitoring the functioning of this segment, thus giving customers greater protection. For these reasons, Latvia has taken this path. There are countries that allow companies in this segment to operate unregulated, while other countries are looking for different ways to protect customers’ interests.
Effective, risk-based and development-oriented monitoring of Latvia’s financial sector is a priority for the FCMC.
This year, the FCMC experts have been working intensively to help companies of this segment develop their peer-to-peer business model into a licensed business. This is a significant step not only for each company, but also for their customers who will be more protected. Correspondingly, this is a new field of activity and an obligation on the supervisor, under the supervision of which new participants enter the market.
Companies that have received an investment firm operating licence will change their business models and gradually cease offering investments in means of cession for both new and existing clients and replace them entirely by offering financial instruments. Although this step requires a strong commitment and time resources for the company, it is nevertheless essential to ensure investor protection and sustainable company development.
After the transitional period specified by the FCMC, investors will receive protection in relation to transactions in financial instruments pursuant to the Financial Instruments Market Law (FIML), the Investor Protection Law, the Directive on markets in financial instruments (MiFID II) and the Regulation on packaged retail and insurance-based investment products (PRIIP), as well as others related to the scope of financial instruments.
In future, investors will be provided with information on investment risks and on investment costs, the assessment of the suitability and appropriateness of customer knowledge and investment experience in relation to specific products will be ensured, and investor funds will be kept separate from the company’s own funds. Other requirements aimed at raising investor awareness and protecting interests will be met.
It is important for investors to know that if an investment firm licensed by the FCMC becomes insolvent and fails to meet its obligations, each investor will be entitled to compensation of up to EUR 20 000 in amount of outstanding commitments.
In order to obtain the investment firm operating licence, a company must submit to the FCMC an application and the documents specified in the laws and regulations. A licence may be obtained provided that a company, its shareholders (participants) and officials comply with the provisions of the FIML and regulatory requirements in the area of anti-money laundering and sanctions risks management. In this way, the FCMC provides a licensing process that complies with international standards, as well as ensures stability of the financial sector and investor protection.
Throughout the licensing process, the FCMC provides the companies with advice and support to meet the requirements for obtaining a licence, while from the company itself, we expect a desire to make efforts and the ability to show progress in addressing the deficiencies and improving the processes. We are pleased to say that most companies achieve their targets. In addition, the FCMC grants companies a transitional period allowing them to gradually ensure full compliance with requirements and change their business processes. The time elapsing between the time when the FCMC receives the company’s application to obtain the investment firm operating licence and the time when the licence is granted depends not only on the FCMC, but also to a large extent from the company itself, preparedness of experts at the beginning of the process, and on the length of time it takes to address the shortcomings identified in the licensing process.
Overall, the FCMC received seven applications for the investment firm operating licence. The four of companies mentioned above have received licences, one company is still in the licensing process, while two have withdrawn their applications.
We are pleased to have every company that is working in a targeted and results-oriented manner. Taking a path from the peer-to-peer lending platform by the company to a licensed investment firm is also a new experience for the FCMC, so we are constantly assessing our internal processes to improve them. Open dialogue with potential and existing market participants is an essential work component for the FCMC. It will hopefully contribute to the growth and sustainability of this new market segment, and Latvia’s experience will be a successful example for other countries.