Peer-to-Peer Lending and the 'Democratization' of Credit Markets: Another Financial Innovation Puzzling Regulators

Abstract

The financial crisis has led to an understandable distrust towards banks and mainstream financial operators and to banks curtailing credit for the weakest part of the real economy. This has also caused the flourishing of non-traditional forms of financial services (such as pawn shops, alternative private markets, microfinance, crowdfunding) having in common the rejection of traditional intermediaries and the idea of democratizing and disintermediating finance. Peer-to-peer lending is a fast rising star capturing regulators’ attention (now highly concerned about shadow banking) because of the variety of risks involved and, consequently, of possible legal qualifications and regulatory responses. In the present paper, after having analysed the main features of crowdfunding, the benefits and reasons for success as well as the risks of P2P lending, I will discuss the major legal issues surrounding P2P lending platforms with special reference to EU law. I will examine the solutions adopted in some countries (US, UK, Italy and France), identifying three different trends in regulatory approach to social lending (banking, securities and “practical”) as well as their weaknesses. Finally, having recognized the need for an ad hoc regulation and the problems arising from a fragmented regulatory response, I will propose some guidelines for creating a common European framework and, more generally, harmonizing such sector, also with reforms at national level. In doing so, I will take into account the most recent developments in EU financial law (e.g. MiFID II, AIFM, etc.), current trends in financial regulation (e.g. “consumerization”), recent studies about P2P lenders’ investment choice process, and the latest evolution of the P2P sector (e.g. entry of professional investors as lenders, automatic bid systems, etc.).

Keywords: crowdfunding, peer-to-peer lending, financial regulation, banking law, securities regulation, European Union, shadow banking, consumerization, behavioral finance, disintermediation, alternative finance, social lending, financial crisis, direct finance