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Simon

Posted on July 26th, 2010 at 11:33 am

Even some voluntary regulation/trade body arrangement would be a start, such as ABTA for travel agents. Maybe an independent accountant or auditor to check :-

1/ That companies are real and not just some way of gathering data for ID fraud.
2/ Lenders / borrowers and Loans Do exist.
3/ Claims made on websites like the number of lenders and amount of monies in markets are correct and not misleading.
4/ Where the data is available Risk projections are better(or worse depending how you look at it) than actual historic data.
5/ Projected Returns claims are realistic
6/ There is some sort of workable exit plan in place to protect lenders if the business becomes unviable or is closed down because it can’t meet some new regulatory standard etc.

Giles is correct one bad apple in this market could leave a sour taste in potential lenders mouths which would have a knock on effect to legitimate sites (Like Zopa).

George

Posted on July 26th, 2010 at 11:52 am

I’m sure some form of regulation or self-regulation would be welcomed by all involved.

The obvious question is ‘Who should pay the regulator’s costs?’ As a Lender, I wouldn’t want to pay more for a service that I already trust. I wouldn’t want borrowers to pay more as that would make Zopa less competitive and/or drive down the rates available to Lenders.

It must be possible to attain accreditation with minimal cost (0.1% or less of amount loaned). Perhaps all P2P Lending sites could pay a fixed cost to be a member of a Federation and a variable cost based on turnover.

It wouldn’t be fair for Zopa to fund the exploratory work only for other P2P Lending Sites to piggy back onto that work free of charge.

George

Simon

Posted on July 26th, 2010 at 1:17 pm

George its always cost with you I’d rather pay 0.1% to guarantee my money / ID was 100% safe than pay nothing and get nothing but grief back.

A Federation would be the cheapest solution by far if the FSA jump in the cost of managing the red tape could be huge. 0.1% of zopas current lend is £100,000 for less than that zopa could get a firm of auditors to validate a random selection of their loan book, check their procedures and prepare a statement that everything is in order. That would satisfy most investors. At least you would have someone to sue if something did go wrong for not doing their “Due Diligence”.

Sorry George I wasn’t having a go but this additional expense could have a positive effect on this market in that it would bring openness, trust and confidence to as yet unregulated market. I don’t think the cost would be large and its an operational cost not a lender or borrower cost. Of course that will I have no doubt being paid by one or the other of them in their fees. I wasn’t thinking of a full money back system like ABTA or the FSA’s 50K deal, but just an independent look at the company by a professional person / body who knows he will get sued if he hasn’t done his due diligence, by not pointing out obvious potential dangers.
Having thought about it wouldn’t a firm of IFA’s be better as if they validated / approved / recommended the site would they not be liable under their insurance if they hadn’t done their job properly.

Tuomas Talola

Posted on July 26th, 2010 at 3:06 pm

I agree that some sort of regulation is in place but the problem is that over time regulation gets bloated. Too much bureaucracy and there is very efficient barrier of entry. Chris Skinner wrote about the banking regulation which seems very uncompetitive: http://thefinanser.co.uk/fsclub/2010/07/why-banks-have-no-competition.html

Regulation should be based on a small number of rules and random checks or based on alleged malpractice.

Ben Milsom

Posted on July 27th, 2010 at 2:26 am

Hi,

I’m the COO of a New Zealand based peer-to-peer lending company that has been working through our local regulatory requirements to bring to market a social lending product for almost three years.

We’ve always thought that regulation has a place in the peer-to-peer market. It brings, as you mention, greater trust, transparency and assurance to potential investors. The cost and process involved makes you grow as a company and think seriously about how you do what you do.

I think however, that there are certain models which work well for p2p lending, and ones that dont. From our point of view, after spending quite some time looking at the different regulatory regimes, the ones that work best are the ones that understand the unique ‘decentralised’ process of peer-to-peer. Trying to cast p2p lending as a form of debt security or equity security (with complex things like limited recourse loans, or redeemable preference shares) ignore the fact that for the most part, the risks of the investment lie in the borrower, not the central provider.

Just look at the sheer amount of documentation that LendingClub and Prosper.com have to make available for their platforms (documentation that nobody reads). This all stems from the fact that they are seen to be a form of security, and need a formal disclosure document to offer that to the public. The focus of the document is not on the loans themselves, but on the entity offering them. That seems to be a misplaced focus. The ‘entity-based’ disclosure has significant problems, especially around keeping it up to date and actually communicating the important risk factors of an investment without overloading it with needless legalese.

We have proposed a regulatory model here in New Zealand that is somewhat similar to the model that you have with Zopa. A p2p company would be classified as a broker, and have certain duties and disclosure requirements for each transaction, but with far less requirement to heavily regulate the actual p2p company itself (such as minimum credit ratings, or minimum capital ratios etc).

If you’re looking for more detail on this, you can find it at http://bit.ly/9M85BE

We’ll be watching with interest how you at Zopa go through this process – many of our regulatory agencies here are aware of Zopa and look to you as the benchmark for p2p lending in a lesser regulated market.

Tim

Posted on July 27th, 2010 at 1:45 pm

Does it should be interpreted as zopa need some sort of control over peer to peer lending in UK?
Is that something critically unfair going on in peer to peer market?
If regulators comes in picture with there long banking experience, dose zopa sure interest of lenders and borrower who originally convince with fairly regulated concept of peer to peer lending in UK?
Why after 5 years of success zopa concerned about regulations? Is that because of only one tiny player at the moment?
Zopa failed 2 times in managing regulation in Italia and US. Action on inviting regulator may concern to all Zopa members.

Marshall2k

Posted on July 29th, 2010 at 4:48 pm

Tim,
Giles is not asking for a regulator that protects Zopa’s position in the market. Any regulator worth its salt would be evenhanded.

Zopa has been concerned with regulation since the start as described in the blog post, it’s just that once insurance was no longer an issue, Zopa was no longer a concern of any existing regulatory bodies.

Your comments about Zopa Italy and Zopa US are a little unfair. Regulation in the US had a severe effect on many (all?) P2P finance players in the US. Prosper certainly got hit as did Loanio, IOU Central and Lending Club. Boober Italy was closed to new members since Banca d’Italia involvement

Chris Walker

Posted on August 3rd, 2010 at 3:07 pm

Trust, process, and regulation have to be considered as related and are vital to Banks and to Zopa.

I agree that Trust is a core requirement of a Banking and Zopas operation and recently the Banks have lost our trust. I also see Process, in respect of money transmission and providing details of money transactions and other information, has been be slow and unfair in the Banks. I also see that Regulation, which should tell us that the Bank is doing what they should be doing, has failed in the last 3 or so years but also failed in 1929 or so and many other time in between!

Trust is about doing the things people expect you to do and doing the things that you say you have done and are going to do. Process should be about doing the right things and Regulation should be a simple checking audit of the above.

Today all individuals have a powerful opportunity, through the Internet, which allows us to interact with all information, and through technology, which allows us to analyse that information. Through social networks we can help each other make sense of that information and enhance it. We will all become communal regulators and will not need to pay others to fail in that regulation as in the past.

Zopa are the leaders in the P2P Loans Platform market and should build on their 5 years experience to become better and better at providing this market. I am a hugh fan as I see that I have an opportunity to be my own personal banker looking after my own deposits and making my own loans.

(I do not see a need for me to be forced to deal with a large organisation that calls itself a Bank but actually is an Insurance Salesman or a cover for using my money, for which they pay mini interest rates, to earn real returns for their staff and shareholders. I want to use what could be called a narrow Bank, which is a holding place for collecting my money and transferring it to pay my bills and to add to my savings. My money in this Bank should be 100% guaranteed very cheaply as it is there for a narrow purpose)

So Zopa should now focus on being the most open and transparent market platform by providing access to raw data on all activity on the platform. It should ensure a process so that every transaction if recorded and acted upon as quickly as technology will allow. (eg No waiting to the next day to record money transferred into their Bank by the Faster Transfer System). It should continue to support the discussion boards and speedily reply to questions and factual concerns raised there, and it should help to develop the educational aspects maybe via a Wiki layout to improve access and filtering by users.

Zopa should publish a code of practice based on its operations and experience and allow members to amend and add to it. This should include “Living Will” proposals setting out the exiting procedures for Zopa, Lenders and Borrowers.

Although individuals should have total control of the use of their personal details, borrowers should be required to provide a link to a personal profile, based on a template, which they agree to share with Zopa and Lenders participating in their loan request. This should include personal credit history, addresses, employment, personal balance sheet and budget. The borrower should also agree to instruct Zopa to pay off certain loans direct as a condition of their Zopa loan. There can then be a facility for comment to Zopa that could help them in accessing the credit worthiness of the borrower.

Zopa should continue to build up the internet Social Network facilities so that the availability of information is published and feed back is openly seen and acted upon.

I am a supporter of self regulation based on a clear and simple code of conduct. With full disclosure and open discussion individual consumers become the auditors. However I think we still need an external independent audit and I would suggest that the Accountancy audit for the annual accounts should be widened so that the auditors responsibilities are to the members of the platform in addition to the Shareholders etc and that they should check a small but independent from management, selection of trades for authenticity.

I believe that this could be a suitable framework for protecting the consumer, for allowing innovation in this market based on the Trust,good Process and Regulation that is need in any financial environment.

We should not let others set the rules and agenda for this personalisation opportunity in the financial market.
Chris