Peer-to-peer lending will soon be available in New Zealand after this country's market regulator today issued its first licence for the financial service to Auckland-based online provider Harmoney.
Financial Markets Authority director of compliance Elaine Campbell said peer-to-peer lending - which had already become popular in the United States and Europe - would bring "new opportunities for lenders and borrowers" in this country.
The service involves an intermediary, such as Harmoney, charging fees for the use of an online platform that brings together lenders and borrowers.
"The service has great potential but lenders should also realise the risks are greater than putting money in a bank," said Campbell. "Lenders can lose money or not get the interest they expect if borrowers fail to repay the loans."
The FMA said business and consumer borrowers could not raise more than $2 million in any 12 month period through peer-to-peer lending.
"The regulations don't impose any limits on the amount lenders can lend, although some service providers may impose limits," the regulator said. "Lenders should remember they may not be able to withdraw their money at short notice."
Harmoney chief executive Neil Roberts said the platform's launch date was "not far away" and the company was delighted to become New Zealand's first provider of the service.
"Harmoney has a fully compliant online platform that automates the process of investing and borrowing," Roberts said. "We couldn't be more excited to lead the charge and shake up New Zealand's personal lending market with a new competitive and technologically advanced investment and lending platform."
DLA Phillips Fox partner Sue Brown said that while peer-to-peer lending offered "plenty of up-side" for small businesses looking to grow, such services should be approached with a caution as similar schemes had ended in failure in Britain and United States.
"There are great opportunities, but failures could ultimately damage the market confidence the FMA is working hard to grow," said Brown, the former head of strategy, innovation and engagement at the FMA. "When failures happen, people don't react logically - they react understandably emotionally and forget the warnings they received."
She said no investment was risk free.
"But businesses looking for funding in this way are likely to be small, untested and speculative - and therefore carry higher than usual investment risk," Brown said. " Unlike more traditional investments - which must be made through offer documents containing clear information about the offer - investors investing through the new platforms will receive only very limited information and warnings before they hand over their money. There will therefore inevitably be failures. Then investors will forget the warnings they received and remember only that they took comfort from the fact the platform was licensed by the Financial Markets Authority."
Equity crowd funding and peer-to-peer lending became legal under the new Financial Markets Conduct Act, which passed into law in April.
The FMA is also expected to grant its first equity crowd funding licenses this month.
Brown said it had taken three months for the first platforms to satisfy the FMA that they meet the minimum standards to be licensed.