The UK FCA has issued an Occasional Paper (No. 18) which looks at recent developments in the ‘market-based finance’ (MBF) arena, suggesting this type of business could provide a competitive and innovative alternative to the traditional business-model and services currently provided or offered across the banking sector. As with all such publications, this paper seeks to stimulate debate based on detailed research and analysis on this particular aspect of what is commonly termed ‘shadow banking’.
Amongst its views and proposals, the regulator has determined MBF could present a favourable capacity to offer and provide better product diversification along with efficient global market potential, in terms of the types of funding accessible to loan institutions, in comparison with traditional capital and finance markets but also in its ability to develop with market conditions, innovate and exploit new technologies. This provides and supports an ability to deliver and distribute global solutions to meet or perhaps better service customers’ needs and requirements into the future. For example, the FCA recognises the efficiencies that could potentially be brought to funding and capital markets through enhanced specialisation, a proven global reach and a broad underlying investor-base. Overall, MBF in its variety of forms e.g. equity-based crowd-funding platforms and peer-to-peer (P2P) lending, is seen as a way for smaller organisations to viably operate and compete across the traditional banking sector, and in turn help to improve access to loans and credit, enhance market liquidity and to help reduce the cost of capital to corporate and personal consumers in both the retail and wholesale markets.
However, though MBF could provide the opportunity and facility for new products and services to be developed and successfully brought to market, a number of relevant and significant risks are also identified, despite the apparent comparative advantages and perceived benefits. These relate mainly to matters of market complexity and potential instability, along with a lack of awareness and understanding of MBF systems and processes by all market participants. In addition, the UK conduct regulator remains cautious as to the potential for inherent or latent market failures yet to be identified or completely visible. This particularly surrounds issues such as collateral and leverage controls as well as dealers capacity for risk-absorption, with a need for more regulatory analysis, scrutiny and future control and supervision in order to assess other specific operational and resilience risks and threats e.g. management and distribution etc. whilst properly securing and embedding the necessary protections of consumer interests.
In looking at the prevailing market contributions of MBF and the existing and emerging issues surrounding this dynamic and evolving area of business, the FCA has also issued a separate independent opinion giving further insight into the global market-based finance industry. Just as the FCA already sees MBF as an important element of the financial system, the insight opinion seems to equally conclude and support the perception that MBF has the potential to become an established alternative offering more modern and efficient solutions for distributing and delivering banking-like services into the future.