Stakeholders in the financial services industry have coalesced around the idea that marketplace lenders need clearer regulation.
Edith Ramirez, chairwoman of the Federal Trade Commission, acknowledged the significant growth of the marketplace lending industry during a June 9 forum hosted by the FTC, the first in a series of events focused on fintech. She mentioned the "rocky spring" for marketplace lending and noted reports that show flagging investor interest in the space. Still, Ramirez said that the potential benefits of the services provided by this new breed of financial institution mean that marketplace lending is "likely here to stay."
During a panel, Brian Knight, senior research fellow for the financial markets working group at the Mercatus Center at George Mason University, called the space "misregulated." He said that bank partnerships with online lenders are a way to circumvent that misregulation and pointed out that government oversight should "reduce risk," not necessarily level the playing field for all players. Business models that produce different levels of risk should be regulated differently, he said.
"It's not a good idea to look at the bank model and just port that over and drop it on," Knight added. "They are different models and they generate different risks and the regulation should reflect that."
With a host of different regulatory bodies in the U.S., it is difficult to know who is regulating what, said Funding Circle's general counsel, Conor French. He pointed out that the regulatory environment in the U.K. is easier to navigate for online lenders who are overseen directly by the country's Financial Conduct Authority.
Lauren Saunders, associate director at the National Consumer Law Center, pointed to the need to "flush out the bad actors" from the marketplace lending industry. French, who helped found the Marketplace Lending Association, affirmed the marketplace lenders' desire to differentiate themselves from other "online lenders" who operate more like payday lenders. The MLA was launched April 6 by Funding Circle, LendingClub Corp. and Prosper Marketplace Inc. to facilitate "broader conversations" about responsible innovation, French said.
French of Funding Circle pointed out that the traditional lending choices in the financial services industry are not working. They are leaving many consumers "underserved and underbanked," he said. French said that in recognizing those "gaps" in the system, marketplace lenders are eager to work with regulators.
In her closing remarks, Jessica Rich, director of the Bureau of Consumer Protection at the FTC, said that it is "encouraging to learn that marketplace lenders are taking proactive steps to self-regulate." Still, she pointed out that self-regulation is "not enough."
"To be meaningful, these types of efforts need robust procedures to monitor compliance and tangible consequences when the rules aren't followed," Rich said. "Otherwise, you can't be sure that companies have the incentive to comply or are complying," she added.