SCUOLA SUPERIORE SANT’ANNA
Classe Accademica di Scienze Sociali Settore di Scienze Giuridiche
Platform consumer credit between private law and financial regulation
Candidato Relatrice
Filippo Morello Prof.ssa Valentina Calderai
Tutor
Prof.ssa Maria Gagliardi
Summary
Introduction ... 5
1. The landscape of platform consumer credit ... 7
1.1. Retail credit markets and digital technologies ... 7
1.2. Platform consumer credit ... 9
1.3. Taxonomies of platforms business models ... 13
1.4. Material scope of the research ... 16
1.5. Legal and regulatory concerns ... 18
2. Platform credit and contract law ... 22
2.1. (The primacy of) a private law research angle ... 22
2.2. Credit transactions according to terms of services ... 23
2.3. Platform credit transactions and contract law in Italy.. ... 27
2.4. ..and in the UK ... 30
2.4. Consumer law in platform transactions ... 33
2.5. Consumer credit and investment law ... 36
3. The perspective of financial regulation ... 42
3.1. Financial regulation and consumer markets ... 42
3.2. Open issues and regulatory objectives ... 45
3.3. The state of the art: mandated disclosure and prudential supervision ... 48
3.4. Towards product regulation and welfare safety nets ... 50
4. Concluding remarks ... 53
Introduction
Digital platforms are business models that redesign the manufacturing and distribution of goods and services. Acting as ubiquitous intermediaries, they avail of digital technologies to expand markets and reduce transaction costs. The novelty of platforms is commonly identified in the new mode of production of goods and services they embody, in which producers and users have a somehow horizontal relationship mediated by a digital marketplace that facilitates the meeting of demand and supply, set up transactions and manages their performance and logistic. In its mutualistic declination, such mode of production has fostered exchanges and bargains at the lowest floor of market pyramid, i.e. where individuals without professional characters act for individual purposes of entertainment, family economy or livelihood consumption. In financial markets, the decentralization platforms are carrying through has interested both product design and assembly and, behind a narrative of empowering collaboration, the spread of financial risk among crowds of deluded individuals.
In the FinTech Action Plan of 2018, the European Commission committed to place customers «in the driving seat» of financial services digitization. While a clear-cut regulatory response is far from ripening, financial technologies are indeed making European consumers increasingly protagonist. Such a central role is epitomized in «peer-to-peer» finance, in which seemingly equal users meet and bargain through an online marketplace. In spite of their constant development over the last decade, these practices lie in a legal and regulatory limbo. On the one hand, no dedicated legislation has interested access to finance through digital intermediaries. On the other, online consumer credit is only obliquely affected by the acquis of retail financial services regulation, namely consumer credit law and financial intermediaries’ regulation, that postulate a business-to-consumer relationship and thus fail to grasp some essential features of peer-to-peer transactions.
Moreover, access to credit through digital intermediaries present an unclear private law setting. Digital platforms gather consumers, match their needs, assess their credit rating, and play a major role in deciding the terms and duration of the loans. In addition, platforms assist parties alongside the loan performance and provide them with further services such as secondary markets for credits and mechanisms to transfer loan shares. In spite of this crucial role, the digital intermediaries are not part of the loan contracts. Such circumstance has a crucial relevance for contract law, since the transactional modules that usually underpin borrowing and
lending do not precisely fit with these practices. Then, platforms contractual neutrality deeply affects consumer protection, since the absence of a business counterpart excludes the application of the doctrines and rules that govern consumer access to credit and, in particular, their exposure to credit risk.
The overall purpose of this research is understanding to what extent platform credit transactions ensure consumer protection. Consumer protection is intended here as the threshold of safeguard that EU law grants to consumers that embark in financial services. The core argument of this work is that further integration in retail finance regulation is needed in order to make platform credit safer for involved consumers. This outcome is reached in steps. First, delimiting the scope of the analysis and understanding how platform transactions work (Chapter I). Then, evaluating whether platform transactions fit with the normative paradigm of consumer credit contracts as provided by general and sectoral contract law (Chapter II). Finally, studying platform consumer credit with the lens of financial regulation in order to complement and adjust the outcomes of private law and incorporate platform finance within the objectives and rationales of the law governing consumer financial markets.
1. The landscape of platform consumer credit
1.1. Retail credit markets and digital technologies
The way digital technologies accompany and serve the financial industry has generally little to do with disruption and revolution, two essentials of the overdosed FinTech vocabulary. Throughout the history, financial and banking practices have acted as risk analysts, managers and transformers in carrying out their traditional functions of lending, liquidity provision, and saving management. This activity, consisting in credit rating calculation, financial indices predictions and strategic allocation of financial assets, has shaped banks as complex organisms that process information on large-scale, as fast as possible and in an increasingly automated way.1 In this view, the computational power and width of credit data secured by the thrust of information technology is likely to improve banking practices in efficiency and accuracy, but not radically transform the features and products of established financial institutions.2 The way
banking services incorporate intelligent algorithms and process credit data certainly raises issues for private law, corporate law and financial regulation, but it is inscribed in a path-dependent evolution of the industry and in well-established regulatory branches and scholarly reflections.
Beside settled financial institutions, however, digitization of finance is interesting sizeable shares of parallel financial markets, from the canonical shadow banking3 to the most heterodox landfall of financialization.4 Unlike institutional finance, where digital offshoots represent the transposition of well-known banking services, digitisation is the figure and constitutive element of the new blocks of financial markets. In this regard, non-conventional financial services are
1 M. A. Poon, What lenders see. A history of the Fair Isaac Scorecard, University of California, 4-5; D. Marron, Lending by numbers: credit scoring and the constitution of risk within American consumer
credit, Economy and Society, 36, 1, 2007, 105; A. Leyshon, N. Thrift, Lists come alive. Electronic systems of knowledge and the rise of credit-scoring in retail banking, Economy and Society, 3/1999, 28,
436.
2 To differentiate technological innovation within banking practices and outside them, some authors use TechFin to refer to the former and FinTech for the latter. On this point, see C. Schena, A. Tanda, C. Arlotta, G. Potenza, Lo sviluppo del FinTech. Opportunità e rischi per l’industria finanziaria nell’era
digitale, in Quaderni FinTech, Consob, 2018, 1.
3 Extensively on this topic, see See I.Chiu, Taking a functional approach to understanding shadow
banking: a critical look at regulatory policy, in I. Chiu, I. MacNeil, Research Handbook on Shadow Banking: Legal and Regulatory Aspects, Elgar Publishing, 2018.
4 Cryptocurrencies epitomize the thrusts towards free and unregulated finance. See E Greene, J. Amico, F. Bala, Blockchain, marketplace lending and crowdfunding: emerging issues and opportunities in fin
tech, in I. Chiu, I. MacNeil, Research Handbook on Shadow Banking: Legal and Regulatory Aspects,
gaining unprecedented market shares thanks to new products, new means of exchange, new transactional features and even new forms of alleged money, fuelled or crafted by the digital matter. The greatest innovation in this sense is certainly associated with the spread of digital platforms, a business model that epitomizes disintermediation and facilitates the distribution of goods and services. As a preliminary remark, suffice to say that digital platforms generally respond to a financial demand that is comparable to that addressed by banks, at least in terms of the typology of transactions and borrowing, saving, or investing interest of which they take charge. At the same time, online intermediaries overturn the way financial services and products are supplied thanks to business models typical of the «collaborative economy»: they match demand and supply of financial services and reverse on users the usual tasks and burdens of financial intermediaries, credit risk above all.
So long as financial innovation mainly affects the organisation and functioning of financial intermediaries, consumer finance appears remote or even immune from them. In fact, the evolution of banking practices raises incidental concerns for consumers, especially in the domain of data protection, but hardly shakes the landscape of consumer contracts and questions their regulation. On the contrary, away from banks (and banking law), online consumer finance is significantly growing thanks to the platform drivers. Digital intermediaries, indeed, extensively cover consumer markets, offering a vast array of services, from loans to insurance and investment products. The ways consumer financial products are supplied online are heterogeneous and depend on the degree of intermediation of the service provider. In case of direct provision, the online intermediary acts as the unique counterpart of the consumer, thus making the transaction almost similar to those with established analogue intermediaries.5 In a slightly different paradigm, the intermediation consist in the online matching between the consumer needs and the products offered by financial intermediaries, either digital or not.6 Finally, the most innovative platform model fosters horizontal transactions between platform participants, who variably meet on the platform and enter into «peer-to-peer» financial contracts.
5 P. Arjunwadakar, The technology driving disruption in the financial services industry, CRC Press, 2018, 55 ss. S. Chishti, How peer to peer lending and crowdfunding drive the fintech revolution in the
UK, in P. Tasca, T. Aste, L. Pelizzon, N. Perony, (edited) Banking Beyond Banks and Money. New Economic Windows, Springer, 2016.
6 E Greene, J. Amico, F. Bala, Blockchain, marketplace lending and crowdfunding: emerging issues
and opportunities in fin tech, in I. Chiu, I. MacNeil, Research Handbook on Shadow Banking: Legal and Regulatory Aspects, Elgar Publishing, 2018.
Peer-to-peer consumer finance, in turn, is a landscape of vastly different practices. The horizontal and peer character of these transactions, in fact, does not imply that the parties have similar status or are both consumers. Indeed, very often parties that are treated as «peer» on the platform may be consumers on both sides, consumer and business or two businesses. The postulate of consumer finance is, needless to say, that at least one shore of the relationship is a consumer and that he is equalised to his counterpart with regard to two elements: the symmetry of the relationship with the intermediary platform, that is equidistant from participants; the fact that parties are in principle interchangeable as long as the consumer may well be the seller-producer or the buyer-recipient.7 As far as the kind of products and services is concerned, «peer-to-peer finance» may consist in: funding and loan provision, in which money is lent by one party and borrowed by the other; equity-based or reward-based investment services, in which consumers can purchase shares of start-ups or small businesses in return for earnings or benefits;8 foreign currency exchanges, in which users can trade foreign currencies on an online platform; investment in hedging, like hedge funds, pensions funds and insurance companies;9
insurance products, consisting in grouping users with similar risk profiles so that a money pool in which premiums paid are allocated serves as a money reserve in case of successful claims by policy-holders.10
1.2. Platform consumer credit
As far as lending is concerned, «peer-to-peer» lending platforms are financial actors that set up credit transactions among individuals through online interfaces. They inherit the spirit of social lending in developing countries, i.e. fostering financial inclusion to reinforce welfare and tackle poverty. Within the paradigm of the collaborative economy, this philosophy takes the shape of mutualistic (peer-to-peer) credit operations.11 Since the appearance of the platform Zopa in
7 See M. Lima Rego, J. Campos Carvalho, Insurance in today’s sharing economy: new challenges ahead
or a return to the origins of insurance?, in P. Marano, K. Noussia (a cura di), Insurtech: a legal and regulatory view, Springer, 2020, 27.
8 See J. Armour, L. Enriques, The promise and perils of crowdfunding: between corporate governance
and consumer contracts, The Modern Law Review, 2018, 81, 1, 51.
9 S. Moenninghof, A. Wieandt, The future of peer-to-peer finance, in Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, 2013, 65, 466.
10 P. Marano, Navigating InsurTech: the digital intermediaries of insurance products and customer
protection in the EU, in Maastricht Journal of European and Comparative Law, 2019, 26, 2, 294
11 M. Pokornà, M. Sponer, Social lending and its risks, Procedia – Social and behavioural sciences, 2016, 220, 33; A. Brill, Peer-to-peer lending: innovative access to credit and the consequences of
2005 in the UK, social lending has grown and thrived dramatically even in Western countries, establishing itself as a crucial articulation of financial services industry.12 The reasons for this spread are to be sought in the short and medium-term effects of the 2007-2009 financial crisis, in which banking credit lines have first turned out to be less reliable than expected, then they have restrained due to higher risk aversion and legal and regulatory benchmarks.13 Among the many reasons of interest, platform lending represent the only peer-to-peer financial services that presents purely horizontal relationships, i.e. transactions between consumers in which the only professional subject involved is the intermediary platform.
Before embarking in a description of business models, the business model of digital platforms shall be briefly considered. Platforms constitute a sui generis model of goods and services production whose functioning is considered to be at the crossroad between a network (a mode of organization of communication and interaction made of hubs and nodes) and an infrastructure (shared resources that facilitate downstream production of other goods).14
Regardless the intermediation activity they perform, the market sector in which they operate, and the features of the involved participants, platforms have common patterns of organization and functioning. First, they are deemed to respond to «a logic of performative enclosure» due to the somehow proprietary space they generate. Second, the employment of participants data, work, and performances responds to «a logic of productive appropriation». Third, while the difficulty to review their terms of services, advertisement and advices ensures «expressive immunity», platform enjoy a power of «fiat interdiction» as long as they are censors and judges of their own environments.15 In peer-to-peer lending, platforms cumulate a series of functions and prerogatives: they are internet service providers that arrange the marketplace and the conditions for the loan conclusion;16 they act as financial intermediaries, since they match
12 European Commission, FinTech Action plan: For a more competitive and innovative European
financial sector, COM/2018/0109 final, 2018;European Commission, Final report: Identifying market
and regulatory obstacles to cross-border development of crowdfunding in the EU, 2017
(https://ec.europa.eu/info/sites/info/files/171216-crowdfunding-report_en.pdf). See also M. T. Paracampo, FinTech tra algoritmi, trasparenza e algo-governance, Diritto della banca e del mercato finanziario, 2019, 2, 213. C. De Roure, L. Pelizzon, P. Tasca, How does P2P lending fit into the
consumer credit market?, Deutsche Bundesbank (Discussion paper No 30/2016);
13 This is, in summary, what is referred to as the «credit crunch». On this point, see chapter III.
14 J. E. Cohen, Law for the platform economy, UC Davis Law Review, 2017, 51, 153. Platforms are deemed to have a strong «network effect», i.e. the economic effect in which the value of the whole network increases with the number of participants. See European Commission, A Digital Single Market
Strategy for Europe, COM, 2015, 192, final, 4.
15 J. E. Cohen, ibidem.
16 «Internet service provider» is here intended in a broad sense. Whether platforms are «service providers» under the definition of the Directive 2001/31/EC or not is discussed in Chapter II.
lenders and borrowers while remaining out of the transactions; they carry out some of the functions proper of banks to the extent that they participate in savings collection and funding provision, they assess parties credit scoring and generally decide upon the loan conditions and the terms of the loans.
The current landscape of «peer-to-peer» credit is the farthest thing from a homogeneous sector, since platforms’ structure affects the offered services, which sensitively differ from one intermediary to another. Within the scope and aim of this work, one only sort of platform is considered, i.e. those matching a would-be borrower with a group of people interested in lending when both parties act for purposes unrelated to a business activity. To identify these business models, three criteria will be deployed: the credit nature of the transaction, which lies in the capital outlay to be repaid with a remuneration, a distinguishing feature of credit agreements;17 the non-professional character of the credit applicants and providers, who
demand credit and invest money for purposes of individual consumption, saving and investment, living expenses, housing, charges or arrears;18 the intermediary role of the platform, which externalizes the money provision thus making the relationship triangular.19
These transactions will be referred to as «platform consumer credit». This formula is not normally applied in this context, where more vague and comprehensive expressions tend to prevail, often imported from economic and sociological studies. Among these, «social lending» is the only generalist label that usually designates online credit to consumers and therefore can serve as a proxy for platform consumer credit.20 Conversely, the umbrella terms most
17 «Consumer credit» is a pillar of the EU financial market regulation after the 2009 crisis. See H.-W. Micklitz, I. Domurath (edited), Consumer debt and social exclusion in Europe, Ashgate, 2015. The autonomy and importance of consumer credit is masterly expressed in I. Ramsay, Consumer credit law,
distributive justice and welfare state, Oxford Journal of Legal Studies, 1995, 15.
18 The notion of consumer varies depending on the market context and is inevitably linked to the type of contract she enters: «first, the consumer is not defined in general, abstract terms, but always with regard to ‘a contract’. Second, that contract has to be concluded for a purpose falling outside the ‘trade or profession’ of a given person» (Opinion of AG Bobek, C-498/16, M. Schrems v Facebook Ireland, 2017, 28).
19 In absence of a legislative definition of platforms, the ELI Model Rules on online platforms (https://www.europeanlawinstitute.eu/fileadmin/user_upload/p_eli/Publications/ELI_Model_Rules_on _Online_Platforms.pdf) define them as «information society services» (article 2, a) that «enable customers to conclude contracts for the supply of goods, services or digital content with suppliers [..], enable suppliers to place advertisements within a digital environment to the purpose of concluding
contracts with consumers, offer comparisons or other advisory services to customers [..] and enable
platform users to provide reviews regarding suppliers, customers, goods, services or digital content offered by suppliers, through a reputation system» (article 1, par. 2, a-b-c-d).
20 M. Latorre, F. Mango, Social lending in Europe. Structures, regulation and pricing models, in J. Fernandez de Guevara Radoselovics, J. M. Pastor Monsàlvez (edited), Crisis, risk and stability in
commonly resorted to in this context hardly fulfil the aforementioned transactional criteria. «peer-to-peer lending» is overly agnostic with regard to the features of credit operation and bargaining parties.21 Similarly, «lending crowdfunding»22 and «lending marketplace»,23 used interchangeably, do not sufficiently focus on the consumer credit transactions, which are the focus of this work. Finally, the «FinTech» portmanteau is too vague to discern banking practices and platform realm, a rather topical distinction.24
As far as credit activity is concerned, all consumer credit platforms follow a common pattern. All business models considered here are «profit» platforms in the sense that parties are charged with intermediation fees.25 To originate a credit practice, lenders and borrowers are required to sign up on the platform. Before subscribing the terms of services, all users are asked to disclose a first array of information, including identity, fiscal code, employment and income situation and bank account number for payments. At this stage, borrowers present their funding request, which is weighed by the platform through a credit scoring procedure. Credit worthiness is evaluated through a combination of traditional and non-traditional credit data, collected from the banking industry and from consumers’ «online footprint».26 In case of financial reliability,
the credit quest is uploaded on the platform together with similar demands, where registered investors scroll through the applications and allocate money to borrowing projects, always
21 The «peer-to-peer» expression is per se misleading in the context of digital platforms. See M. Lima Rego, J. Campos Carvalho, Insurance in today’s sharing economy: new challenges ahead or a return
to the origins of insurance?, in P. Marano, K. Noussia (a cura di), Insurtech: a legal and regulatory view, Springer, 2020, 27
22 A. Sciarrone Alibrandi et al., Marketplace lending. Verso nuove forme di intermediazione
finanziaria?,Quaderni FinTech, Consob, 2019, 11.
23 Crowdfunding is a widespread phenomenon that encompasses at least three heterogeneous practices: equity-based, reward-based, and lending-based crowdfunding. See J. Armour, L. Enriques, The promise
and perils of crowdfunding: between corporate governance and consumer contracts, The Modern Law
Review, 2018, 81, 1, 51; European Commission, Crowdfunding in the EU Capital Markets Union,
Commission Staff Working Document SWD(2016) 154 final, 2016, http://ec.europa.eu/finance/generalpolicy/docs/crowdfunding/160428-crowdfunding-study_en.pdf; De Buysere, et al., A framework for European crowdfunding, European Crowdfunding Network, 2012, http://eurocrowd.org/wpcontent/blogs.dir/sites/85/2013/06/FRAMEWORK_EU_CROWDFUNDING. pdf.
24 F. Ferretti, Consumer access to capital in the age of FinTech and big data: The limits of EU law, Maastricht Journal of European and Comparative Law, 2018, 25, 4, 476.
25 Reportedly, fees do not affect the overall profitability of a bargain in which the transaction costs of banking services are cut. For an overview of the economic literature, see N. Branzoli, I. Supino, FinTech
credit: a critical review of the empirical literature, Banca d’Italia, Questioni di Economia e Finanza,
2020, 549.
26 The literature on platform credit scoring is vast. For a summary of the arising legal issues, see A. Sciarrone Alibrandi et al., Marketplace lending. Verso nuove forme di intermediazione finanziaria?, Quaderni FinTech, Consob, 2019, 88. For a quantitative perspective, see D. F. Ahelegbeya et al., Latent
diversifying risk through the option for multiple borrowers.27 When the amount requested by each applicant is reached, the loan is granted: the borrower receives money associated with an amortization plan, whereas lenders purchase small investment products.
As a general feature, credit platforms deliberate on the riskiness and adequacy of the bargain for both debtors and creditors. Instead, the setting of cost of the overall operation, including interest rate and additional expenses and the terms and conditions of money outlay and restitution vary from different models of platforms.
1.3. Taxonomies of platforms business models
The economic and legal literature on credit platforms has profusely attempted to describe and discern platforms in order to provide clusters of platforms that are organized or work in the same way. Although the literature on this topic mainly resort to two general criteria to differentiate business models, i.e. the platform’s structure and the type of transactions performed, an overview of existing categorization may prove useful to narrow down the scope of this enquiry. The taxonomies reported in this section refer to lending platforms available for consumers, being other peer-to-peer finance operations excluded. Anyway, almost all of the business models have common characteristics: reliance on data analytics and algorithms to derive funding decisions and loan interest rates; automation of administrative tasks; lack of physical branches or banking locations; quicker decision on loan origination; loan with limited sums, no collateral and short-term maturities; addressing market segments that are under-served by banking activity. The majority of the categorizations reflect the specificities of different national markets.
One taxonomy focuses the way clients’ money is managed by the platform28. It identifies a first
model in the «client-segregated account model», in which the platform serves as a mere window for loans. When the loan is originated the clients’ money is placed into a bank account separate
27 Investment diversification is mandatory in all reliable platforms. See M. Pokornà, M. Sponer, Social
lending and its risks, Procedia – Social and behavioural sciences, 2016, 220, 33; M. Latorre, F. Mango, Social lending in Europe. Structures, regulation and pricing models, in J. Fernandez de Guevara
Radoselovics, J. M. Pastor Monsàlvez (edited), Crisis, risk and stability in financial markets, Palgrave, 2012, 116.
28 E. Kirby, S. Worner, Crowdfunding: An Infant Industry Growing Fast, OICV-IOSCO Staff Working Paper, 2014, 3, available at:
from that of the platform, over which the platform has no right.29 In the «notary model», once the funding goal is met, an affiliated bank originates the loan, and the platform issues a note to the lender that reflects the amount of money that has been invested. The borrower repays the note to the bank, which transfers funds to the platform. The latter ultimately pays the lenders.30 Finally, in the «guaranteed-return model», the platform matches lenders and borrowers, defines the terms and conditions for the loan, issues the loan directly, manages the investments of borrowers and repayments of lenders and sets a guaranteed-return rate for borrowers.31 The present taxonomy is the official IOSCO one and has proven seminal for subsequent works. Other authors32 have studied US platforms and divided them in two models: platform lenders and balance sheet lenders. «Platform lenders» are matchmakers, they do not originate the loans, nor they provide the capital. The platform is neutral to the credit provision, and in case of default the platform does not suffer any credit risk. The sequence unwinds as follows. The borrower applies for a loan and the platforms assigns him a credit rating, at this point a bank or third-party fund decides to purchase the loan, in which case the bank is the loan provider and therefore consumer protection rules can be applied. Then, investors invest on the platform, that uses investors’ money to purchase the loan from the bank. At this point the platform issues SEC-registered unsecured participatory notes to receive any amount paid by the borrower. The platform has no duty to repay the loan to the investors, it only has the duty to transfer them the money that the borrower repays. «Balance sheet lenders» are platforms that operate as direct lenders, so they are regulated similarly to proper banks and are outside of this study.
Some works merely distinguish between platforms lending for businesses and for consumers.33 The distinction is of great relevance, since both the financial relationship and the applicable regulation vary sensibly, but is almost agnostic vis-à-vis the activities carried out by the platform. In this sense, more meaningful categorizations adopt the degree of intermediation exerted by the platform as the core criterion. This is the case, for instance, of the minimal dichotomy between a «spread» model, in which borrowing and lending requests are processed and decided by the platform thus avoiding any contact between the participants, and a «direct»
29 The platforms Zopa and Funding Circle in the UK adopt this model. 30 This is the case of the platforms Prosper and Lending Club in the USA. 31 The Chinese platform CreditEase works according to this model.
32 E Greene, J. Amico, F. Bala, Blockchain, marketplace lending and crowdfunding: emerging issues
and opportunities in fin tech, in I. Chiu, I. MacNeil, Research Handbook on Shadow Banking: Legal and Regulatory Aspects, Elgar Publishing, 2018.
33 A. Sciarrone Alibrandi et al., Marketplace lending. Verso nuove forme di intermediazione
model, in which parties are allowed to bargain and fix the terms and conditions of money outlay and return.34 In spite of its vagueness, this approach sheds light on the crucial role of platform in the credit provision and on the degree of its intermediation, a topical issue in view of a private law characterization of peer-to-peer lending.
In this view, the transactional role of the platform is well grasped by a further categorization that is fit for the purpose of this work.35 In the so-called «purely direct» lending models, borrowers and lenders meet on the platforms and agree the technical and economic conditions of the loan. Borrowers indicate the maximum interest they are willing to pay and negotiate with interested investors the conditions of the loan. The payment circuit is ruled by the parties, with direct disbursement on the corresponding bank accounts. The platform manages credit scoring and provides technical support. In fact, the very few purely direct models do not allow contractual negotiation between parties, but remit loan conditions of cost, duration and interests to an auction between investors.36 Instead, in the so-called «brokered» model, the platform is
assisted by a further business subject, a micro-finance institution or a traditional financial institution. The broker manages all the credit process: borrowers’ assessment and admission, investors’ subscription, loan conclusion and performance. The broker can be either a business unit of the same institution ruling the platform or a separate business actor. Although broker models are quite popular, few of them operate in the field of consumer credit.37 Finally, in the «direct» (or «pass through») model, the platform fixes the terms and conditions of loan restitution and manages the monetary flows between parties, drawing on own funds only in case of need. «Direct» consumer credit platforms, the focus of the present work, are the most widespread. The analysis and claims advanced in the following pages, albeit generally formulated, are based on the observation of four platforms.
While the «purely-direct» or «auction» model are slowly disappearing,38 the brokered ones involve layered relationships that imply the securitization of the loan and its transfer to a
34 Osservatorio Enterpreneurship and Finance, V Report Italiano sul crowdfunding, 2020, 41.
35 The taxonomy is taken from M. Latorre, F. Mango, Social lending in Europe. Structures, regulation
and pricing models, in J. Fernandez de Guevara Radoselovics, J. M. Pastor Monsàlvez (edited), Crisis, risk and stability in financial markets, Palgrave, 2012, 116. Information on the functioning of each
platform are taken on platforms terms of services or interfaces. An established literature on single business models is still missing.
36 See the platform Monestro, https://www.monestro.com/.
37 See, for instance, the platform YoUnited Credit, https://it.younited-credit.com/. The platform ViaInvest (https://viainvest.com/) is a spurious brokered one.
38 S. Chishti, How peer to peer lending and crowdfunding drive the fintech revolution in the UK, in P. Tasca, T. Aste, L. Pelizzon, N. Perony, (edited) Banking Beyond Banks and Money. New Economic
special-purpose vehicle. For this reason, these transactions lean towards equity operations and fall outside the scope of this work. The following pages therefore focus on the «direct» business model. The categorization proposed is not all-encompassing nor conclusive since it does not grasp all the facets of the platform lending phenomenon.39 Moreover, most the business models operating in the European scenario escape this strict categorization, being constant evolution and transformation a constitutive trait of all platforms.40 However, the taxonomy deployed here permits to differentiate among platforms in the light of who decides the terms and conditions of the loans: in all «direct» credit transactions, the terms and rules of the transactions are set by the platform.
1.4. Material scope of the research
Several platforms from different jurisdictions operate with the «direct model». As online business models, peer-to-peer intermediaries have no specific geographical restrictions.41 Nevertheless, being applicable legislation and regulation very often national, the present work restricts the observation to platforms active in two jurisdictions, namely Italy and the UK. The peer-to-peer consumer lending market in Italy reported around € 135 million of loans.42 The most active models in this landscape in 2019 have been Smartika, Soisy, BLender, Prestiamoci, all of which are partnered with a Payment Institution or a financial intermediary. YoUnited Credit, a French platform that leads the Italian consumer lending market, is a funding provider rather than a peer-to-peer intermediary since, in Italy, investors do not directly pick loan requests but they purchase loan shares after securitization.
All platforms in the Italian landscape operate in a comparable way, consisting in screening and pooling borrowers and lenders and allowing investors to pick credit requests depending on the category of risk and profitability of loans. Within this general pattern, platforms have their own peculiarities. On Smartika, borrowers’ requested sums are assigned a credit rating, a loan duration and an interest rate and classified in categories, named «markets»; as soon as an
39 Alternative taxonomies are related to the aforementioned formulas normally deployed to refer to platform credit. For a summary, see A. Sciarrone Alibrandi et al., Marketplace lending. Verso nuove
forme di intermediazione finanziaria?,Quaderni FinTech, Consob, 2019, 11.
40 J. E. Cohen, Law for the platform economy, UC Davis Law Review, 2017, 51, 153.
41 Many platforms, however, require users to be resident in the country in which the platform is settled. This is the case of the UK platform Zopa.
investor decides the category he wants to fund and the subsequent profitability-riskiness of the operation, the platform divides each investor’s sum among fifty comparable borrowers. Smartika also has a «Lender Protection» service that purchases the loan quotes from investors in case of credit deterioration. Soisy is a platform that matches consumers and investors for e-commerce purposes.43 On Soisy, investors make their decisions on a product or service purchase request advanced by borrowers. E-commerce businesses partner with the platform, that offers users’ a guarantee fund to temper the default risk. Prestiamoci is a consumer lending platform that offer investors the alternative between manual and automated investment, the latter being an algorithmic service of funding requests selection that operates following investors directives and preferences. Similarly, also BLender offers automatic investment functions but, unlike other platforms, has not activated yet a guarantee fund or compensation scheme to cover loan defaults.
In the UK, the volume of P2P consumer lending amounted at at £1.4 billion in 2018, with an annual increase of 20%.44 Peer-to-peer platforms in the UK operate according to the «client segregated account» business model, so that all funds from lenders and borrowers are separated from the platform’s own balance sheet. Except for the property lending platforms, peer-to-peer intermediaries offer unsecured loans. Reportedly, all deploy automated credit scoring models.45 A high level of borrower vetting has contributed to keep defaults at some of the lowest rates in the lending industry. Below, the main platform operating in the consumer credit sector is briefly described.
Zopa is considered the pioneer of P2P lending platform as it started its business in 2005 in the UK. Originally a consumer loans company, Zopa has them differentiated its offers in various sectors. It has also a partnership with Uber to create a market for drivers who would like to buy their own car. Many other firms have partnered with Zopa to foster consumer purchase in specific sector driven by credit provision obtained on the platform. The section ‘personal loans’ on the website allows consumers to request a loan and receive a credit score. If they are deemed
43 https://renditepassive.net/soisy/
44 According to the 5th UK Alternative Finance Report released by the Cambridge Centre for Alternative Finance in November 2018, in 2016 20% of borrowers on were repeat borrowers, a decrease of 5% year-on-year, while the majority, namely 67%, of lenders on the platforms were repeat lenders. Data referring to 2016 also showed that a majority of platforms – 66% – have no partnership with an institution at all, while 33% are in part owned by an institution. Previous surveys showed that, in the UK, the average sum lent was 5.000 £ and that average lenders for each operation were 200. More than half borrowers in consumer lending received an offer from banks. Fairly half of borrowers used the sum to purchase a car.
creditworthy, their application is presented to investors who can invest in the funding request. Zopa has a ‘Safeguard Fund’ to repay investors in the event of a borrower defaulting on their loan. Their fund is in a trust held by a not-for-profit organization and it is activated on a discretionary basis by Zopa. Partnered with the British Business Bank (BBB), RateSetter lend through to those needing loans for personal and business purposes. RateSetter advertises to be a low-risk P2P platform, with a strict vetting policy for borrowers. It is deemed to be lender friendly as investors can start with as little as £10. Reportedly, RateSetter is a great example of a website design and functionality that gives the user an experience matched with the ease and simplicity of their business model. RateSetter was the first to provide a «provision fund» and their website states that no investor has lost a penny since their launch in 2010. With an investment spread across multiple borrowers, defaults at these rates become manageable with repayment funds in place.
Other interesting platforms, such as Funding Circle, CrowdFunding and Folk to Folk only provide business loans. However, since the lending activity is generally open also to retails investors, the considerations made in this work with regard to investors protection may be referred to this business models. Finally, property lending platforms are emerging as a peculiar actor of the UK market. Relevant platforms are ReLendex, Blend and PropLend. However, they are not within the scope of this work.46
1.5. Legal and regulatory concerns
Digital platforms raise plenty of issues for regulators, judges and scholars. Research on platform is transversal and ranges from competition law to financial regulation, from labour law to intellectual property law. As far as private law is concerned, platforms have triggered relevant question about the type of contracts they enter into47 and, more specifically, their status of
46 In 2016, Peer-to-peer Property Lending generated £1.218 billion, a 6% increase on 2016’s volume of £1.147 billion. Since 2015, it has raised £2.97 billion, 41% of which was in 2017. The acceptance rate for 2017 nearly doubled year-on-year to 33.6%. Of those qualified to raise funds on the platforms, 74.6% successfully raised funds. Overall, 21.43% of P2P property lending platforms utilized some sort of a referral agreement. Additionally, while only 7.1% of platforms were partially owned by an institution, 71% had no partnership with an institution at all (Cambridge Center for Alternative Finance, 5th UK
Alternative Finance Report, 2018).
47 S. Grundmann, The digital dimension as a challenge to European contract law - The architecture, in S. Grundmann (edited), European contract law in the digital age, Intersentia, 2018, 1.
proper contractual counterparts.48 Then, with reference to online credit markets, several authors have warned about the threats to consumer protection stemming from peer-to-peer lending. While some of them address general and transversal problems,49 some of them highlight the specific challenges for consumer credit regulation.50 Several authors have warned against the risks for data protection deriving from algorithmic credit scoring51 and a growing literature has pointed out the discriminatory concerns stemming from credit scoring techniques, both at the scholarly52 and policy53 level. After more than a decade from their development, credit platforms operate in an uncertain and almost unquestioned contract law framework. The challenges for contract law in this sector mainly concern the kind of intermediation carried out by the platform and the type of relationship it has with the participants. Subsequently, the credit-debt relationship between the alleged peers is surrounded by extreme vagueness in terms of qualification and applicable rules. Moreover, a related class of problems arise with regard to the application of the consumeristic acquis Communautaire to peer-to-peer credit relationships. In fact, it is almost unclear whether and to what extent the legal safeguards that accompany and
48 P. Iamiceli, Online platforms and the digital turn in EU contract law: unfair practices, transparency,
an the (pierced) veil of digital immunity, European Review of Contract Law, 2019, 15, 4; I. Domurath, Platforms as contract partners: Uber and beyond, Maastricht Journal of European and Comparative
Law, 2018, 25, 5, 565; P. Palka, Terms of service are not contracts. Beyond contract law in the
regulation of online platforms, in S. Grundmann (edited), European contract law in the digital age,
Intersentia, 2018, 135.
49 E Greene, J. Amico, F. Bala, Blockchain, marketplace lending and crowdfunding: emerging issues
and opportunities in fin tech, in I. Chiu, I. MacNeil, Research Handbook on Shadow Banking: Legal and Regulatory Aspects, Elgar Publishing, 2018; M. Latorre, F. Mango, Social lending in Europe. Structures, regulation and pricing models, in J. Fernandez de Guevara Radoselovics, J. M. Pastor
Monsàlvez (edited), Crisis, risk and stability in financial markets, Palgrave, 2012, 116.
50 F. Ferretti, Consumer access to capital in the age of FinTech and big data: The limits of EU law, Maastricht Journal of European and Comparative Law, 2018, 25, 4, 476.
51 M. Hurley, J. Adebayo, Credit scoring in the era of big data, in Yale Journal of Law and Technology, 2017, 18; S. Barocas, A. Selbst, Big data’s disparate impact, in California Law Review, 2016, 671; D. Keats Citron, F. A. Pasquale, The scored society: due process for automated predictions, in Washington Law Review, 2014, 89, 1.
52 Z. Borgesius, Discrimination, artificial intelligence and algorithmic decision making. Study for the
Council of Europe, 2018. A relevant work has documented the presence of considerable racial bias in
the traditional UK consumer lending market, showing that a decision rule based on machine learning predictions could eliminate such bias (W. Dobbie, A. Liberman, D. Paravisini, V. Pathania, Measuring
bias in consumer lending, National Bureau of Economic Research, Working Paper 24953/2018).
Another study has analysed the potential implications for different race and ethnic groups of using machine learning models for credit risk assessment in the US mortgages market. They find that changes in predicted default propensities across race and ethnic groups differ significantly (A. Fuster, M. Plosser, P. Schnabl, J. Vickery, The role of technology in mortgage lending, Federal Reserve Bank of New York, Staff report, 2/2018).
protect consumer in financial services are applicable to these transactions. Chapter II of this work deals with the mentioned private law issues.
The second perspective adopted in this work is financial regulation. A more established strand of studies exists on this point. The literature has reflected upon the nature of the intermediary, noting that the more the platform is involved in the operation of money collecting and lending, the more it is similar to a bank or an institutional investor.54 Some works have highlighted that platforms are fully-fledged financial intermediaries, since they perform the two activities of brokerage and risk transformation and are therefore to some extent comparable to established intermediaries.55 Other authors seem sceptical about the process of «re-intermediating» platforms,56 whereas others suggest that, despite an authentic «mainstreaming» of peer-to-peer
platforms would be undesirable, the recognition of lending platforms self-regulation could preserve the features of a more socially useful type of finance, rather than facilitating the mere rent-seeking.57 The present work acknowledges these regulatory questions but claims that they
are inherently intertwined with the private law ones. In this sense, while the latter aim at recognising the transactions and providing them with a framework of hard-law entangled rights and duties, the former can enrich the private law reasoning with fundamental insights in the functioning of credit markets, evidences on the needs of involved parties and potential effects of law reforms or incentives modification. At the same time, the reasoning of financial regulation in designing financial markets has to take into account the transactional rules of private law and uphold and complement them or, where appropriate, argue for adjustments or radical transformation. The role and challenges of financial regulation vis-à-vis platform consumer credit and its private law rules are discussed in Chapter III.
A fundamental question demonstrates the link between private law and financial regulation in this domain: to what extent the economic activity of credit platforms is coextensive to those of banks? Platforms are not integrated structures that lend money to consumers, but instead they combine money demand and supply without resorting to own funds. On the one hand, this intermediary practice helps platforms cut down the costs and duration of traditional loan
54 Lin, Out of the shadow? Promises and challenges of peer-to-peer lending, in I. Chiu, I. MacNeil,
Research Handbook on Shadow Banking: Legal and Regulatory Aspects, Elgar Publishing, 2018.
55 O. Havrylchyk, M. Verdier, The financial intermediation role of the P2P lending platforms, Comparative Economic Studies, 2018, 60, 115.
56S. Moenninghof, A. Wieandt, The future of peer-to-peer finance, in Schmalenbachs Zeitschrift für
betriebswirtschaftliche Forschung, 2013, 65, 466
57 C. Rogers, Clarke, Mainstreaming social finance. The regulation of the peer-to-peer lending in the
origination; on the other hand, platforms promote fully online transactions that foster the de-formalization of the lending experience. The overall cutting of transaction costs is inherently linked with the recipient of platforms loans. Actually, all credit platforms implicitly or explicitly target the periphery of institutional lending circuit, i.e. borrowers with distressed credits, with insufficient credit score or invisible to the banking industry.58 In this regard, lowering transaction and origination costs permits to include in the credit market the edge consumers that would not be otherwise accommodated. This evidence clearly emerges from economic literature dealing with social lending platforms, where borrowers are averagely found to be riskier and, subsequently, interest rate higher than in banking services.59 The diversity in terms of transaction organization, services offered and market segment suggests that platform credit is not the digital transposition of traditional credit, serving as a substitute of banking activity where it does not reach.60 Instead, platform consumer credit permits the financialization of an
overall more vulnerable class of consumers, and the legal framework has to take this evidence into account both at the contractual and regulatory levels.
Who the targeted consumers are and what their risk and behaviour are represent proper regulatory questions that resounds in the private law problems tackled in this work. Once again, in answering how «protective» for weaker parties the law of platform credit should be, private law and financial regulation are both necessary and insufficient discourses that must complement each other.
58 There is abundant literature demonstrating that FinTech businesses target the most vulnerables consumers. See H. Tang, Peer-to-peer lenders versus banks: Substitutes or complements?, The Review of Financial Studies, 2019, 32, 5, 1900; M. D. Maggio, V. YAO, Fintech borrowers: Lax-screening or
cream-skimming?, SSRN Working Paper, 2019, 322; T. Berg et al., On the rise of fintechs - Credit scoring using digital footprints, NBER Working Paper, 2018, 245; G. Buchak et al., Fintech, regulatory arbitrage, and the rise of shadow banks, Journal of Financial Economics, 2018, 130, 453; R. Aitken, All data is credit data. Constituting the unbanked, Competition and Change, 2017, 21, 4, 274. For the
opposite view, see J. Jagtiani, C. Lemieux, Do fintech lenders penetrate areas that are underserved by
traditional banks?, Journal of Economics and Business, 2018, 100, 43. According to some analysts, the
evidence that FinTech credit targets more vulnerable borrowers does not automatically imply that the default rate in the FinTech sector is higher. In any case, the silence of the legal debate on the protection of such vulnerable consumers is at least surprising.
59 C. De Roure, L. Pelizzon, P. Tasca, How does P2P lending fit into the consumer credit market?, Deutsche Bundesbank (Discussion paper No 30/2016).
2. Platform credit and contract law
2.1. (The primacy of) a private law research angle
So far, the private law rules involved in platform credit have drawn little attention from commentators and regulatory bodies. On the one hand, private law has encountered a disproportionately scarce interest if compared to the economic and regulatory works on the subject. On the other, online credit practices have not yet reached courts, where issues specifically concerning parties’ interaction may have arisen. Reasons for such neglect must be sought in the relative novelty of the phenomenon, in the pre-eminence of the policy-oriented perspectives of analysis, in the difficult to litigate the rules laid down by the platforms, and in the overall opaqueness of platform practices. All these factors constitute, at the same time, valuable reasons to explore a ground largely untouched. The relationship between the parties reflect private law modules in two respects: provision of money in view of gradual return is articulated as a debit-credit transaction; conducts and entitlements along the main debit-credit core are self-regulated by parties, with consensual rules governed by the law of contracts. The present work asserts that private law matters should take priority over other viewpoints. In the face of a swirling commercial evolution and vibrant regulatory debate, private lawyers should carve out their own space of analysis between the socio-technical analysis of platforms and the desirable policy response. This deals with the inherently indefectible nature of private law rules to markets: every interaction referring to economically valuable assets, knowledges or relationships must be ascribed to a private law concept or rule that codifies and enforces it, regardless how unsuitable, distortive or inefficient the legal toolkit is. Therefore, confronting with the Stone Guest of private law modules is preliminary to any normative argument concerning the inadequacy of applicable rules or the convenience of different governing frameworks. This assumption suggests delving into the transactional features of the funding relationship set up by platforms, at once liquid and entangled. This analysis is necessary to discern who has a duty or a right to what, on what ground and towards whom under applicable law.
These premises point at contract law as the reference domain for the analysis. As voluntary agreements entailing money transfers, platform transactions can find their primal recognition and qualification under contract law which, as far as lending at interest to consumers is concerned, therefore represents the referring framework. Indeed, as discussed below, consumer
credit contracts are subjected to an intensive regulation of market entry requirements, disclosure regulation and product regulation that specifically aim at protecting weaker parties vis-à-vis financial and credit risk.61 The notion of contract law assumed in this chapter thus ranges from proper contract rules to relevant sectoral legislation that insist on credit transaction. Such a wide approach inevitably sets aside other private law topical matters, above all the data protection concerns stemming from credit scoring and the intellectual properties issues associated with platforms activities.
The present chapter delves into the transactions designed by platforms and aims at assessing their statute under contract law according to a logic of recognition, i.e. whether and to what extent platform transactions fit with financial contracts models and their regulation. To this purpose, after exposing how relevant platforms build the credit relationship, the multilateral transactions are analysed in their structure and purpose to find out which contractual figures and rules may apply under the Italian and UK legal system. Subsequently, this chapter attempts to assess how consumer credit law can play a role in governing platform credit. Consumer credit law will be intended in a comprehensive sense, encompassing rules and principles scattered in consumer law regulation. This part of the analysis will mainly deal with EU secondary law in consumer credit and therefore no differentiation will be made between Italy and the UK, even though the outcomes presented significantly vary in the two jurisdictions.
2.2. Credit transactions according to terms of services
The starting point of this enquiry is observing the intermediaries’ terms of services. Below are reported the general terms and conditions that consumers are required to subscribe. Two case studies are taken into account, the platforms Zopa and Soisy, respectively representative of standard practices in the UK and Italy.62
61 A. Fejős, Social justice in EU financial consumer law, Tilburg Law Review, 2019, 24, 68; I. Domurath, Consumer debt and the social function of contract, European Law Journal, 2016, 22, 6, 758 62 The platform Zopa is the founder of peer-to-peer lending and constitutes a paradigm of organization for other platforms in the UK. The 2014 Regulation by the Financial Conduct Authority, that has laid down uniform rules for conduct of business in this field, has contributed to a standardization of credit platforms in the UK. Today almost all platforms, comprised RateSetter, the second for market share, are structured very similarly to Zopa (O. Osuji, U. Amajuoyi Online peer-to-peer lending: challenging
consumer protection rationales, orthodoxies and models?, Journal of Business Law, 2015, 6, 485). The
choice for Soisy as representative of the model of Italian platforms is due to the clarity and accessibility of the platform terms of services if compared to the obscurity of other platforms. Even in this case, however, the way the digital intermediaries operate is somehow dictated by the regulatory setting and is experiencing increasing standardization and convergence of business models.
Zopa users are required to register and indicate their interest either in lending or borrowing. The application is in various respects similar to a bank form and gives Zopa permission to access data on them. Consumers are registered with pseudonyms. At this point, credit applications are assessed by the platform, which uses a combination of information provided by borrowers and information purchased from Equifax and Credit Bureau to evaluate the risk of default. Borrowers are divided in three risk categories, A*, A, B and C with decreasing credit scores and chance of success. Prospective borrowers request a quote by stating the amount and length of proposed borrowings. Loan requests and offers follow a specular path. Together with personal details and financial information, borrowers have to indicate the purpose, duration and amount of their funding application.63 In case the request is accepted by the platform, it is provided with an interest rate and an amortisation plan. with potential lenders, who have previously set out the conditions on which they are prepared to lend. As for lenders, they are required to reveal the interest rate they are willing to lend to, the amount, and length of time they are prepared to lend for and the credit ratings of borrowers they prefer to lend to.64 While
traditional bank lending is funded by customers’ deposits and lent out to other bank customers, lenders on Zopa are invested with the responsibility to select the type of investment and remuneration they are willing to lend. The decisions are made scrolling down the anonymised loan requests, divided by risk category (and thus profitability).
As with most lending platforms, Zopa is not party to the loan contracts that it sets up. The contractual relationships are, in principle, three: the parallel ones that link each borrower and lender with the platform and the final loan between the peer parties. The first contract contains the terms of use of the platform and authorises the intermediary to carry out the necessary steps to set up the loan. These steps include, on the borrowing side, credit scoring, packaging of the loan application with duration, interest rate, and amortisation plan, and matching with interested borrowers. On the lending side, to present the funding request and to conclude the final loan contract. The terms loan that binds the debtor to return the loan in instalments to the lender is entirely drafted and enforced by the platform. Indeed, while terms and conditions merely result from the information and preferences that parties disclose, the performance and enforcement of the loan are almost entirely remitted to Zopa: the platform manages the investors and borrowers
63 Zopa offers borrowers loans for three main purposes: car purchase, home improvement, and debt consolidation. Customers may opt for other purposes and disclose them to the platform. See the Zopa website, https://rates.zopa.com/?amount=10000&term=60&origination_journey=shopfront.
64 See the declarations of G. Andrews, chief executive of Zopa, interviewed by Evan Davis in the program Alternative Finance, The Bottom-Line BBC, February 17, 2013.
funds, pooled in a bank account that the platform accesses to arrange the money outlay and instalment repayment; the platform «negotiate and execute on your behalf any agreement or deed in relation to loan application»;65 the terms of services also mandate the platform to do «anything else we reasonably consider necessary to negotiate, administer and manage your loans», for instance collection activities on missed repayments. However, the apparent neutrality of the platform to the credit agreement is contradicted by the terms of services themselves when they affirm that «all of our loans start off as a loan from Zopa Bank to the borrower». In conclusion, the «peer-to-peer» narrative conceals the fact that loans are originated by the platform and then sold in shares to willing lenders.66 This is extremely meaningful in terms of consumer protection.
As other platforms, Zopa supervises the relationship evaluating and managing the credit risk and ensuring that lenders’ losses are as low as possible. This is made through entry requirements, information provision and diversification of the lenders’ funds. Reportedly, lenders averagely invest £5000 on lending, and Zopa makes sure the funds are spread across numerous borrowers in small units.67 Zopa assembles the cheapest loan it can out of the £10
units and presents them to a borrower as a quote. This result in multilateral transactions, in which each borrower is bound to several anonymised investors. As additional services, Zopa offers secondary market options to lenders, either purchasing itself the entire loans or loan shares or promoting the selling to third parties. The loan flexibility and the direct involvement of the platform in providing the loan and eventually selling it are specifically intended to protect investors from default risk, in respect of which Zopa declines all responsibilities and don’t even offer compensation funds in case of borrower’s distress.68
Moving to Soisy, here too the subscription of the terms of services by both borrowers and lenders initiates the loan origination process and also poses the rules that govern the whole credit operation. Soisy attaches the general conditions of contract to the terms of services, whereas others rely on platform conditions of use to manage entirely users’ participation.69
65 See the Zopa interface addressed to lenders-investors: https://www.zopa.com/investor-principles.
66O. Osuji, U. Amajuoyi Online peer-to-peer lending: challenging consumer protection rationales,
orthodoxies and models?, Journal of Business Law, 2015, 6, 485
67 A. Brill, Peer-to-peer lending: innovative access to credit and the consequences of Dodd-Frank,
Washington Legal Foundation Backgrounder, 2010, 25, 1;
68 Several other platforms have compensation schemes that indemnify investors: FundingCircle, Lending Crowd, Folk2Folk. These mechanisms are often charged services and arbitrarily activated by the platforms.
69 On Soisy, see https://www.soisy.it/pdf/Condizioni_Generali_Investitore.pdf; https://www.soisy.it/pdf/Condizioni_Generali_Richiedente.pdf;
Terms of services subscription enables all users to have a own profile with an amount of money picked up from a connected banking account; this fund is held by the platforms, that according to the terms of services is entitled to make authorized payments on behalf of all users, also automatically. At this step, the relationship combines the features of a contract with a payment institute, namely a payment mandate, with the inherent ambiguity of platforms contracts, whose truly contractual nature is questionable, to say the least.70
Once a user profile is created, borrowers and lenders can advance, respectively, a funding or an investment request. The procedure is specular for both the credit sides. Indeed, the start of a credit or investment applications marks the conferment of further tasks to the platform under the contract of mandate. On the one hand, the borrower’s money request mandates the platform to evaluate a credit rating, to decide on the risk class of the request, to accept the application where appropriate, to elaborate adequate loan setting as for duration, interest rate and repayment program; once the loan request is packaged, it is uploaded on the investors wall, where it is matched with funding supplies. On the other hand, investors are equally bound to the platform by means of an agreement of mandate regulated by terms of use. Under this contract, the platform provides anonymous investment offers classified in view of amount, riskiness, and duration, and sets up investment transactions according to investor’s risk preferences. At the same time, platforms receive a mandate to perform credit exaction and debt collection in case of non-performing loans.71
Together with loan origination, terms of services and terms of contract structure each of the granular credit transaction. In fact, these rules are explicitly intended to regulate, as a corollary of subscription, the concluded loans: the credit conditions and amortization plans are made by the platform as provided by the mandate agreement; repayments are made automatically, drawing money from borrowers’ funds to lenders’ ones; loan performance is managed by the platform, that avails of early termination clauses, unilateral amendment clauses and disclaimer clauses in case of consumer default.72 The case of consumer default, in particular, is paradigmatic of how the multilateral relationship works. While terms of uses subscribed by borrowers provide that the platform has a right to terminate the contract in case of missed
70 P. Palka, Terms of service are not contracts. Beyond contract law in the regulation of online platforms, in S. Grundmann (edited), European contract law in the digital age, Intersentia, 2018, 135.
71 See, again, the general conditions of contract subscribed by investors:
https://www.soisy.it/pdf/Condizioni_Generali_Investitore.pdf, in particular par. 2.2.
72 See the general conditions of contract subscribed by borrowers on Soisy (https://www.soisy.it/pdf/Condizioni_Generali_Richiedente.pdf): ‘What is provided under the contract is extended to all loan operations and loan contracts between a borrower and one or more investors’.
