Peer-to-Peer Lending, Regulatory Response, and Institutional Design
With the worldwide revolution in financial technology (“FinTech”), Peer-to-Peer (“P2P”) lending, an alternative funding channel, has grown rapidly over the past decade. P2P lending benefits digital financial inclusion by providing an online platform to facilitate direct trades between borrowers and lenders with limited intermediation by traditional financial institutions. During P2P lending transactions, a significant amount of transaction records are accumulated, thus creating a FinTech-driven credit assessment mechanism to help underserved borrowers, who are often turned down by traditional financial intermediaries, obtain credit. In light of the increase in P2P lending over the past decade, as emphasized in an article by Dirk A. Zetzsche et al., many financial regulators across jurisdictions have attempted to “balance the traditional regulatory objectives of financial stability and consumer protection—the focus of post-Crisis regulatory changes—with the objectives of promoting growth and innovation” in the past several years.
As discussed in more detail in my paper “To Regulate or Not to Regulate? A Comparison of Government Responses to Peer-to-Peer Lending among the United States, China, and Taiwan” published in the University of Cincinnati Law Review, P2P lending business models as well as government responses to those models differ. For example, the U.S. reactively regulated P2P lending start-ups under its extant securities regulations, setting forth regulation that may be intentionally strict so as to contain industrial development. In contrast, after a slew of major P2P scandals, including outright criminal violations, the Chinese government abandoned the initial hands-off regulatory approach and became reactive as well, by requiring business models of Chinese P2P lending to be limited to the information intermediation. Thus, in China, other models, such as the asset securitization model or debt assignment model, can no longer be adopted.
When it comes to government responses to P2P lending in Taiwan, the Financial Supervisory Commission (“FSC”), the sole financial market watchdog in Taiwan, had been reactive by highly encouraging collaboration between P2P platforms and banks, while warning that the P2P lending industry should not cross four major red lines drawn under existing regulatory and business structures; such regulatory response actually implied that the platforms need to comply with laws and regulations applied to banks. The Taiwanese government, however, has become more proactive—at least in form, introducing the Financial Technology Development and Innovative Experimentation Act (the “FinTech Sandbox Act”) in January 2018, to permit cautious regulatory experimentation via the regulatory sandbox. Though a positive effort, such a proactive shift in response to FinTech may, in substance, have been proactive in form alone, as the legislative sandbox may not be an effective means to address regulatory dilemmas between prudential regulation and financial competition and innovation. Whereas the legislature attempted to embed the institutional philosophy of collaborative dialogical governance in the FSC via the FinTech Sandbox Act, the FSC would in practice remain reactive in response to FinTech, such as P2P lending, by continuing to engage in conservative implementation, while maintaining a predominantly prudential focus due to being susceptible to regulatory capture, inertia, and risk-averse decision-making. This pattern of activity prioritizes financial stability over financial competition and innovation. This is because the government lacks the institutional incentive to replace the existing regulatory regime with something truly proactive.
Therefore, I would propose a structural change in the current institutional design that could reallocate the authority of financial competition and innovation to a more motivated financial agency, separate from and independent of the FSC, that would be better positioned to safeguard financial competition and innovation enabled by FinTech. Specifically, in order to refrain from forcing FinTech startups to exit from Taiwan and relocate overseas due to long-term regulatory uncertainty, we could preliminarily consider a holistic reform agenda, i.e., adopting a fully independent consumer financial competition watchdog. With a newly created single professional agency playing the role of promoting financial competition and innovation for consumers independently from the FSC, the concerns of fostering healthy competition in offering digital financial services or products such as P2P lending to traditionally underserved consumers might be brought a real step closer from the periphery of Taiwan’s domestic financial system, to the power found at its apex.
Chang-hsien Tsai, National Tsing Hua University, Taiwan.