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Opportunities and Challenges in Online Marketplace Lending U.S. Treasury Report

On Tuesday, May 10, 2016 the United States Treasury Department published a white paper entitled “Opportunities and Challenges in Online Marketplace Lending.”

“There is a clear need for greater transparency in the market for borrowers and investors,” Treasury Counselor Antonio Weiss said Tuesday in a call with reporters. He said Treasury recommends that regulators form a group to examine oversight needs for the industry and figure out “where further regulatory clarity could benefit the market.”

This report and call to action comes on the heels of the resignation of Renaud LaPlanche, the founder and now former Chief Executive Officer and Chairman of Lending Club, the largest global marketplace lender.  An internal review found a failure to disclose a personal interest in an investment fund the company was considering investing in. The review also found that he was among managers who had knowledge of abuses that were tied to the sale of some loans.

It has become clearer that marketplace lenders need to be more transparent about their business practices and some should be subject to additional oversight from U.S. regulators, according to a Treasury Department study released as the industry grapples with market turmoil and a scandal involving one of its leading firms.

The Treasury department said today in the released white paper/ report (attached) that companies in the burgeoning industry need to develop a public database for tracking data on their loans, and firms that lend to small businesses in particular should be subject to more federal consumer protection laws.

Treasury sought public comment on the marketplace lending industry to help government officials better understand the different business models and products being offered in July 2015.  Treasury outlined six recommendations, including calling for online lenders to improve how transparent their products are to borrowers as well as investors and the need for them to employ consistent standards and disclosures.

You can read the full report here.

House Bill Would Increase Cap on Equity Crowdfunding

By Gregory Roberts, Bloomberg News

March 24, 2016 — New online crowdfunding Web portals won’t go live until mid-May, but a key House Republican is already renewing efforts to ease existing restrictions on how much money companies can raise via the innovative technique.

Rep. Patrick McHenry (R-N.C.) introduced legislation (H.R. 4855) that would lift to $5 million the amount that an individual venture can raise under the crowdfunding exemption from securities law in the 2012 JOBS Act. That represents a fivefold increase on the $1 million cap now in the law.

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The University of Cambridge and University of Chicago 2015 Americas Alternative Finance Benchmarking Survey

The study is supported by the Inter-American Development Bank (IDB), Business Development Bank of Canada (BDC), KPMG and a number of leading industry research partners

The Cambridge Centre for Alternative Finance at Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation at Chicago Booth School of Business are jointly launching the 2015 Americas Alternative Finance Benchmarking Survey. This survey will be a comprehensive and empirical assessment of crowdfunding, peer-to-peer lending (marketplace lending) and other forms of alternative finance across North, Central and South America and scheduled to be available in April 2016.

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FINRA Guidelines: How to Apply as a New Funding Portal?

January 29, 2016, republished [original content]

FINA has published guidelines for firms to register as funding portals for Title III, Regulation Crowdfunding.

For your firm to become a registered funding portal with FINRA, your firm must complete the following steps.

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FINRA Funding Portal Rules and Related Forms Approved by SEC

January, 29, 2016, republished [original]

Executive Summary

The SEC approved FINRA’s proposed Funding Portal Rules and related forms for SEC-registered funding portals that become FINRA members pursuant to the crowdfunding provisions of Title III of the JOBS Act and the SEC’s Regulation Crowdfunding. FINRA’s Funding Portal Rules will become effective on January 29, 2016, which aligns with the effective date of the SEC’s registration rules under Regulation Crowdfunding. This Notice provides a brief overview of the new Funding Portal Rules and provides information for prospective funding portals that plan to apply for FINRA membership.

The text of the Funding Portal Rules is available on FINRA’s website. The related forms are available for reference in the Appendices. (As discussed further in this Notice, prospective funding portals must file all forms electronically through FINRA’s Firm Gateway. The forms will be accessible on Firm Gateway effective January 29, 2016.)

Questions regarding this Notice should be directed to:

Alissa Robinson, Director, Membership Application Program, at (212) 858-4764; or
Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961.
Click here to see more.

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Financial Stability and Shadow Banking

Posted December 10, 2015

Federal Reserve Vice Chair Fischer delivered remarks at the “Financial Stability: Policy Analysis and Data Needs” 2015 Stability Conference sponsored by the Federal Reserve Bank of Cleveland and the Office of Financial Research. Here is discussed financial stability and shadow banking.

Vice Chair Fischer believes that there are “five factors that contribute to financial fragility”: (a) high debt burdens at households and firms; (b) elevated leverage and maturity transformation within the financial sector; (c) complexity and interconnectedness in intermediation chains; (d) low risk premiums on assets, especially assets funded with debt; and (e) complacency on the part of investors, supervisors and decision-makers in the private sector of the financial system.

During Vice Chair Fischer’s presentation he offered an assessment of vulnerabilities in the financial system; and identified gaps in the current understanding of conditions inside and outside of the banking sector that should be addressed by regulators and researchers.

He stated, “An essential element of [the federal regulatory] infrastructure is learning the lessons of history – both the lessons of what happened, and the fact that supervisors and regulators will on occasion be surprised”.

Mr. Fischer made the following assertions regarding what needs to be understood to monitor financial stability:

  • A Closer Look at Shadow Banking: The reduction in leverage and maturity transformation associated with better regulations leaves the financial system “much more resilient – even if such regulations have modestly affected market liquidity.”
  • What We Know and What We Do Not: Data on a range of activities – including securities lending, bilateral repos, and derivatives trading – that create funding and leverage risks “remain inadequate and hence could prove destabilizing if sufficiently large or widespread.”
  • Data Are Not Enough: We Need Theory Too: An “important area in need of development” is economic modeling on interconnectedness, particularly on the interaction of shadow banking, banks and the broader financial system. Further, research that distinguishes between banks and nonbanks, or highlights how their interactions are driven by economic incentives, could guide regulator efforts to collect data and set policies to limit possible instabilities associated with interconnectedness.

Though Vice Chair Fischer made no mention of the alternative investment landscape of P2P Lending, it will be interested to see where Peer -to- Peer Lending Marketplaces will be placed as related to shadow banking as a contributor to financial stability in the coming years.

 

 

 

New peer-to-peer operating principles for P2P Financial Association Members

October 28, 2015, posted by Kim Wales

Christine Farnish, Chair of the Peer-to-Peer Finance Association (P2PFA) announced new operating principles that will enhance risk management and promote transparency for the sector.

Over the last 12 months, data collected by P2P FA showed that almost £2bn worth of new lending in the EU P2P industry  from consumers, small businesses and property lending almost doubling.

The new guidelines require P2P association members to publish debt data to a common standard, make their loan books transparent and ensure that retail investors are competing on the same level playing field as institutional investors.

“Our new operating principles set a benchmark of fair dealing and transparency,” said Christine Farnish, Chair of the P2PFA.  “By the New Year, all our members will publish their full loan books, show bad debt losses in a comparable way, and commit to ensuring that retail investors get a fair deal compared with institutions.

“These new measures will help build further consumer confidence, demonstrate our commitment to ethical practice and set a beacon of good practice across the market.”

You can see a copy of the new guidelines here:

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Capco Insights: Journal of Financial Transformation, Issue 41

July, 1, 2015;

Issue 41 of the Capco Journal of Financial Transformation released. In this issue Capco focuses on the existential crisis embroiling finance. The lead article, by Kim Wales, Regulation and Cyberfinance: A new economic revolution liberating financial markets? Seeks to answer some of the questions driving this debate: What is currency? What is value? What is a business? What is a bank, even?

You can read the lead article in Issue 41 here.

ESMA issues Q&A on anti-money laundering and investment-based crowdfunding platforms

July, 1, 2015, Originally posted by ESMA,

the European Securities and Markets Authority (ESMA) issued today a Questions and Answers (Q&A) solicitation in order to promote the sound, effective and consistent application of rules on anti-money laundering and terrorist financing to investment-based crowdfunding platforms. The Q&A aims to promote common supervisory approaches and practices in the application of anti-money laundering rules to investment-based crowdfunding. It provides responses to questions posed by national competent authorities in the course of ESMA’s work on investment-based crowdfunding, drawing on expert input from the Joint Committee sub-committee on Anti-Money Laundering.  The Q&A is aimed at national competent authorities to support them in ensuring that their supervisory approach is effective, taking into account the characteristics of and risks associated with different aspects of investment-based crowdfunding platforms.

Not all invstment-based crowdfunding platforms have the same regulatory status. Some are within the scope of the Markets in Financial Instruments Directive (MiFID); others fall within the optional exemption provided by Article 3 of that Directive where they may be regulated under specific national regimes; others may fall outside the scope of MiFID and of those some are regulated under national law, while others are not. There are also other EU rules potentially relevant to investment-based crowdfunding platforms, such as the Payment Services Directive (PSD).

Those platforms which operate within MiFID are automatically subject to rules designed to combat money laundering and terrorist financing under the Third Anti-Money Laundering Directive (3AMLD). ESMA has sought to clarify the status of the other platforms, by analysing the potential risks and issues arising in different cases and their treatment under the applicable EU rules.

Policy Reform for Cryptocurrency

Foreign Affairs — 02/12/2015

Industry thought leaders convened in NY  for the Foreign Affairs: Cryptocurrency Policy Reform conference.  The discussions included three pillars: