REGULATION

Disagreement exists about regulation of online lending. The space currently seems to fall between the cracks of financial regulators, such as the Federal Deposit Insurance Company (FDIC) in the U.S.

or the Financial Services Authority (FSA) in the UK. Marketplace lending platforms essentially sell shares that are linked to the performance of their loan portfolios. This blurs the line between lending and securities registration. Fear exists that regulation could stifle growth and innovation, but it is obvious that regulation is necessary in any stable financial system. Another concern is how online lenders will perform in a downturn. Few data exist about their performance in the financial crisis of 2007/8, and they have yet to experience a full credit cycle.

However, some federal oversight of online lending exists. In 2008, the Securities and Exchange Commission (SEC) required that marketplace lending companies register their offerings as securities, according to the Securities Act of 1933. In the U.S., a marketplace lender must therefore register its platform notes with the SEC before selling securities to the public. However, as long as the operator offers platform notes privately to accredited investors, they can bypass registration. Additional requirements exist for the creation of a secondary market for platform notes, loan securitization, and other transactions. Then again, savvy platform operators can find a way to avoid most of these rules.³⁴

Regulators should aim at the following main issues with online lending: transparency and disclosure, and standardization of oversight and monitoring. The following paragraphs describe each briefly.

2.11.1 Transparencyanddisclosure

Transparency is in the best interest of all stakeholders in marketplace lending. For borrowers, such protections would include measures against predatory or discriminatory practices, privacy protection and guidelines for debt collectors.

Securities regulators have an interest in protecting lenders on marketplace lending platforms as they purchase platform notes. Those investor protections include disclosures required in any sale of securities, and remedies available to purchasers of securities harmed as a result of a failure of an issuer to adhere to securities laws. Lenders also benefit from the disclosure of profit and loss, the exposure to risks and ways to manage them. Online lending takes place mostly outside of the established financial sector, so the stability of the market should be of concern to regulators as well. Since borrowers and lenders have increasing exposure to the shadow banking system as a source of credit, they may be potentially vulnerable to shocks that are difficult to mitigate. In particular, credit volumes, and derivatives on these, should be transparent and reported in a straightforward manner. Of course, this is easier said than done. Because the online lending space is fragmented across many different private companies, it is impossible for regulators—and the platforms themselves—to gain a clear picture of the overall exposure of individual counterparties. How marketplace lending impacts the stability of the financial sector is therefore a topic on which more research is necessary. We will discuss some ideas along these lines in Chapter 16, in the third part of this book, where we map out the hybrid financial sector.

2.11.2 Standardization of oversight and monitoring

It is still unclear who exactly the regulator for newly emerging online financial services should be. Marketplace lending lingers in a grey zone between securities law and lending, and there is no capital adequacy. Regulatory agencies should take care to define responsibilities, standardize reporting requirements and monitoring practices. The online lending space has never experienced financial stress in its brief period of existence. As more lending platforms and their investors engage in securitization, being in the dark about effective risk could be dangerous. The funding sources of online lending platforms are highly correlated, with the bulk coming from institutional investors and other large investment funds. Financial transactions on platforms could be vulnerable to unforeseen volatility in the shadow banking sector, from which they draw capital.

2.12

<< | >>

↑

Source: Akkizidis Ioannis, Stagars Manuel. Marketplace Lending, Analysis Financial, and the Future of Credit: Integration, Profitability, and Risk Management. Wiley,2016. — 344 p.. 2016

More financial literature on Economics.Studio

REGULATION

More on the topic REGULATION: