Person-to-person Lending - Legal Regulation

Legal Regulation

In most countries, soliciting investments from the general public is considered illegal and crowd sourcing arrangements in which people are asked to contribute money in exchange for potential profits based on the work of others are considered a security.

Dealing with financial securities is connected to the problem about ownership—in case of person-to-person loans, who owns the loans (notes) and how that ownership is transferred between the originator of the loan (the person-to-person lending company) and the individual lender(s). This question arises especially when a peer-to-peer lending company does not just connect lenders and borrowers but borrows money from users and then lends it out again. Such activity is interpreted as a sale of securities and a broker-dealer license and the registration of the person-to-person investment contract is required for the process to be legal. The license and registration can be obtained at a securities regulatory agency such as the Securities and Exchange Commission (SEC) in the U.S., the Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority in the U.K.

Securities offered by the U.S. peer-to-peer lenders are registered with and regulated by the SEC. A recent report by the General Account Office explored the potential for additional regulatory oversight by Consumer Finance Protection Board or the Federal Deposit Insurance Corporation, though neither organization has proposed direct oversight of peer-to-peer lending at this time.

In the U.K., the emergence of multiple competing lending companies and problems with subprime loans has also called for additional legislative measures that institute minimum capital standards and checks on risk controls to preclude lending to riskier borrowers, using unscrupulous lenders or misleading consumers about lending terms.