I’ve written about regulation before, but only in the context of the US and how regulation can be potentially unhelpful in its approach to innovation. I think the subject needs revisiting, but this time relating to the UK and how it’s potentially important for consumer protection.
I have also written before about how Zopa welcomes competition as we think it should help to “normalise” the activity and therefore increase the size of the market overall, but to do so it needs to engender the same feelings of trust in its users that we have tried so hard to create, which brings me back to the subject of regulation.
If I cast my mind back to the end of 2004/early 2005, when we were working towards Zopa’s launch, we saw meeting the needs of regulation as the principal potential barrier, not the development of the technology. It was all uncharted territory so we invested heavily in time and money in understanding the positions of the FSA and the OFT and in getting to grips with the various relevant aspects of contract law to define the relationships between parties and in being able to create workable terms and conditions for our users. We planned to sell insurance, an FSA regulated activity, so had to apply for authorisation. This was at times a painful process as we had to detail the whole of our proposed business and not just the narrow insurance activity, but one which certainly added discipline to our approach generally. Unfortunately we had to give up our FSA regulation when we stopped that activity a few years later and when the scale of our main lending marketplace activity was not significant enough to attract the attention of the regulator. I say unfortunately because we have always considered the building of trust to be absolutely critical for our long term success and regulatory oversight should clearly be a help in this regard.
But now the scale of our business is significant. We will shortly have lent £100m of consumers’ money to other consumers. Imagine the (perfectly reasonable) outcry if that were to go wrong! Now that we have shown how to plot a path through UK regulation in such a way that, given we don’t sell insurance any more, there is effectively no oversight over how we operate and we have shown that there is strong market demand for the service, it is no surprise that we see the entrance of competitors. What is potentially troubling is that they won’t have had to invest in understanding or meeting the needs of the regulator. On the one hand I shouldn’t care; if they don’t operate the business responsibly or correctly they won’t generate trust and will fail, but on the other hand, and much more importantly, they could damage consumer trust in this new activity as a whole.
So what do I propose? I think the activity of person-to-person lending should be formally regulated (by whoever is the regulator at the time). Not as a bank, and not in the overarching manner that the SEC has applied in the US, but in a way that protects consumers while allowing them the benefit of accessing innovation. And this is something I’m working hard at!