A House Far Less Divided Than It May Appear: Harmonizing Industry and Government Perspectives in Marketplace Lending


[Editor’s note: This is a guest post from Conor French, General Counsel at Funding Circle. Funding Circle is a Platinum Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco.]

Has anyone noticed that even in a climate of rising government scrutiny of marketplace lending, policymakers and regulators, on the one hand, and marketplace lenders, on the other, are more often than not actually saying the same thing? Policymakers want to expand access to capital and credit for small businesses and consumers. Regulators want to protect borrowers and investors, while not stifling innovation. Marketplace lenders want responsible financial innovation to vastly improve the ways in which our financial system can match the supply of capital with demand.

And yet the specter of future regulation is wielded against marketplace lending over and over again. You see it in recent industry coverage ranging from major media outlets to rating agency briefings. You see it in the frequency with which regulatory uncertainty is evoked to justify suddenly bearish reports from many equity research analysts. You see it in increasing tunnel vision towards future regulatory compliance during most investor and partner diligence visits – often significantly surpassing time spent actually evaluating the efficiency and effectiveness of our credit processes and/or technology platform, which is ironic because marketplace lenders are considered financial technology companies.

So how can we cut through the noise of a supposed regulatory unknown and focus instead on what we all value: getting better, faster, and more affordable capital in the hands of creditworthy small businesses and consumers without sacrificing adequate customer protection and industry stability?

We realize that mutual understanding and consensus-building between all government stakeholders and marketplace lenders is much easier said than done. The unique challenges of navigating the American regulatory landscape for financial services are well trod. For example, a panelist at the Federal Reserve Bank of San Francisco recently marveled that, in consumer finance alone, there are five federal agencies that govern direct deposit accounts, an additional 25 federal agencies that govern consumer financial products, and a counterpart for many of those federal agencies in every single US state and territory. So just aligning the perspectives and priorities of various government stakeholders may require substantial time, effort, and, yes, also compromise.

But we as an industry took a significant step forward last week to unify our voice so that we can better engage policymakers and regulators on not only the benefits of marketplace lending to borrowers and investors, but also on what may be necessary to ensure the safe growth of our industry. Funding Circle joined fellow industry leaders, Lending Club and Prosper Marketplace, to launch the Marketplace Lending Association (MLA) in a collective effort to promote responsible business practices and encourage sound public policy.

While collaboration among policymakers and regulators isn’t easy, neither is cooperation between direct competitors in an industry still just taking shape. Our willingness and commitment to working together should encourage government stakeholders that we recognize the challenge of educating policymakers and regulators from Agana to Augusta and from the White House to Capitol Hill, and that we’re united in our resolve to responsibly grow our industry for the benefit of borrowers and investors alike. We’ve even proactively adopted a robust code of business conduct to prove it.

As each of the MLA’s founding members reinforced in our respective responses to the US Department of Treasury’s request for information on marketplace lending, we don’t need specific regulatory relief to operate our companies. None of our business models hinge on regulatory arbitrage or circumvention. Quite the opposite, marketplace lenders already operate within extensive, and often labyrinthine, existing activities-based federal and state regulatory frameworks. We organized the MLA because we believe that it is imperative that our government stakeholders fully understand how our industry works and appropriately take into account the value to our financial system alongside any risks.

Looking at our experiences across the pond, we remain optimistic that there may be a blueprint for us to follow. In the UK, we launched the Peer-to-Peer Finance Association (p2pFA) in 2011 with Zopa and RateSetter as a self-regulatory body for the sector that promotes high standards of conduct and consumer protection. In an effort to support responsible financial innovation, the Financial Conduct Authority worked closely with the p2pFA and its founding members to enact balanced UK legislation that has paved a path toward prudent growth for the marketplace lending industry there.

We at Funding Circle deliver fast, transparent, and affordable capital to creditworthy American and European small businesses. We know that we can play a vital role in bridging the small business credit gap. We know that we can answer the call of policymakers who rightly decry the inability of Main Street small businesses – those same small businesses that employ over half of our American workforce – to access sufficient capital and credit.

We at Funding Circle also treat our customers fairly and protect their interests. For example, observing the exploitative impact of widespread predatory practices in the underserved small business lending market, we helped introduce a Small Business Borrowers’ Bill of Rights to empower, protect, and educate small business owners accessing credit. We know that we can answer the call of regulators, who are rightly concerned about potential risks posed by cowboys and bad actors, by adhering to a code of business conduct — addressing investor transparency and fairness, responsible lending, safety and soundness, governance and controls, and risk management.

As a leading global marketplace lender, we’re not trying to fly below the Beltway radar. We’re committed to improving our customers’ financial well-being and we’re committed to doing so within existing customer protection guardrails. All we’re requesting is the opportunity to work with, not against, government stakeholders to lift the perceived regulatory overhang in our sector, so that we can continue to drive forward a more transparent, efficient, and customer-friendly financial system.

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