Opinion Alternative Lending

Disclosure standards: framing the debate

In recent years, a wealth of marketplace lenders have sprung up across Europe, each with their own spin on lending, brokering and crowdfunding. And while regulation is beginning to catch up with the burgeoning industry, disclosure standards and levels of transparency still vary massively amongst the myriad of marketplace lenders.

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Next week I will be discussing risk-reward characteristics and standards of disclosure across mainland Europe and the UK with a panel of marketplace lenders and peers at the AltFi Europe Summit.

The debate over standards of disclosure for the group has at times been singularly focused on comparing risk and return on a like-for-like basis. Here are my thoughts on how to broaden the discussion and explore a common set of interests benefiting both industry and end-users in the long-term.

Why frame?

The European alternative finance sector is estimated to have grown 92 per cent to €5.4 billion last year. It continues to experience substantive growth. The players are diverse and the stakes are high.

How the disclosure standards debate is framed will greatly influence the environment in which discussions take place. The perspectives will differ along several different axes – industry role, business model and geography, to mention a few.

The different perspectives should all be embraced as they are the building blocks of long-term success; the goal should be to use these differences productively toward a solution and not allow them hamper the positive growth the industry has enjoyed so far.

Identifying the key question

Ultimately, the key question is: how can we find a disclosure standard that will allow the industry to continue to thrive and grow its user-base with the support of national regulators and government?

If we are to find an answer to this question the discussion will have to build on the common goal of continued growth. We must acknowledge the different perspectives around the issue and drive towards a solution that demonstrates commitment to both investors and end-users.

Evaluating existing approaches

At present both regulation and disclosure standards vary widely across Europe. In the UK the big four (MarketInvoice, Zopa, RateSetter and Funding Circle) are providing sufficient disclosure to allow third-party validation of their lending data. The consistency and proactive approach is positive – a good start that benefits investors as well as the wider industry. The Dutch are also starting to move towards jointly agreed upon standards. The ongoing debate is centered on the who, how and when.

Perhaps one of the most interesting initiatives in Europe is that of the crowdfunding sector in Germany. The German Crowdfunding Association (BundesverbandCrowdfunding) recently announced that its twenty-one members have adopted common rather stringent standards for reporting to investors. A move designed to firmly establish the credibility of the sector.

Interestingly the reporting standards go above and beyond the legal requirements set by the German financial regulator BaFin. They also surpass the international standards of crowdfunding associations in terms of clarity and commitment. A play to boost the industry that has been underdeveloped? It would certainly seem so.

The move towards standardised disclosure is also seen outside Europe. Lenders in the US introduced the Innovative Lending Platform Association (ILPA) in 2016. The ILPA's SMART Box (standing for Straightforward Metrics Around Rate and Total Cost), provides small businesses with standardised comparison tools and explanations to help them better understand rates, fees and terms before they take out a loan with a marketplace lender.

The end game

The existing initiatives of self-regulation across Europe are without a doubt a positive but ultimately, we also need to ask ourselves what we should be driving towards?

I view the current efforts mentioned as a first step towards a set-up with an independent third party. In the end you need outside assessment to ensure integrity and effectiveness. The journey towards this will be uncertain with interesting stakes. In a post-Brexit world for example the FCA could make a play to put in place a framework sooner rather than later leading to positive interest in marketplace and online lending and a continuation of the growth of our industry.

I look forward to hearing your thoughts next week!

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