WFC Employees BANNED from Peer to Peer Lending

Employees Banned from investing in peer to peer lending - Banned Sign

I saw this post by Peter Renton at Lend Academy and thought it was something to be shared with those folks who may not have seen it. Wells Fargo has banned their employees from investing in peer to peer lending as it represents a conflict of interest. As peer to peer lending has grown it is increasingly becoming a threat to the traditional banking industry and is altering the financial balance that has existed for years.

The article (free registration required to read the article) states the following:

“Ethics administrators” at Wells Fargo decided to forbid staff from P2P lending after concluding “that for-profit peer-to-peer lending is a competitive activity that poses a conflict of interest”.

Tensions between banks and peer-to-peer platforms have arisen because the P2P model cuts traditional lenders out by matching capital directly with borrowers. The juicy yields on offer have attracted investments from a range of would-be lenders, including hedge funds and private individuals.

I do feel bad for employees of Wells Fargo because while the bank makes money from Lending Club (through the Lending Club Trust Account) their employees are banned from benefiting from the platform they support. However, no matter the potential rewards of peer to peer lending, it isn’t worth losing your job to continue to invest.

Ultimately, the competition between traditional banks and the newer “upstarts” is going to continue to increase. This is the first of many interesting things to come as Lending Club continues its trek towards an IPO this year and Prosper looks on pace to become profitable. During 2013, peer to peer lending exploded in recognition and popularity. I believe 2014 will marked by the success of both Prosper and Lending Club from a profitability and industry shaking standpoint. Small business lending will be the next niche tackled and the opportunity for both investors and borrowers will be large.

As an aside, this does get me excited to continue following along with Lending Club as they work towards their IPO. A possible candidate for a small growth position perhaps… and of course, I won’t stop investing!

What are your thoughts on those folks now banned from peer to peer lending? How disruptive will peer to peer lending be for traditional banks?

Flickr: Gareth Simpson

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Comments

  1. I was surprised to see that today as well WYOR. It seems a little heavy handed. I wonder if there isn’t more to the story?!

    -Bryan

    • Very heavy handed and poorly considered in my opinion. The negative backlash and outcry might far outweigh any benefits from instituting the ban. I do believe there is probably more to the story, but the next couple years will be very interesting as P2P Lending continues to grow.

      Thanks for commenting Bryan!

  2. That sucks for those employees that were thinking of investing there or already doing so. But it’s par for the course for the financial industry. If you work for a brokerage company I think you have to have your accounts there. There’s all sorts of regulations for financial companies so it makes sense. It sucks, but it’s fairly standard and one of the costs of working in the financial industry.

    I think P2P will continue to grow and eat into some of the profits, but I’m curious what the average P2P loan is. I honestly haven’t followed it that much since I can’t use that here in Texas, but is the average P2P loan something that most banks would even touch? Say a $2.5-7k loan. I have no idea whether they would or not because I’ve never gone to a bank for a loan other then for my mortgage and even then I had my mortgage broker handle all of that. Just curious how much overlap there is between traditional banks and P2P.

    • I am not familiar with the rules and regulations on limiting what you can and cannot invest in while working for a particular company, especially since you aren’t necessarily investing IN Lending Club and/or Prosper, just WITH Lending Club and/or Prosper. I think where things might get murky is that both Lending Club and Prosper are privately held companies which is obviously different than a publicly traded company as far as transparency goes. I will still need to look into the rules for a better understanding of how this policy could be implemented.

      As for the size of P2P Lending, it has the opportunity to be extremely disrupting to the current banking picture. The average loan for Lending Club was over 14k in December with approximately $300 million of issued loans between both companies during the same month. Given the historic growth trends, I would anticipate them issuing north of $6 billion in loans during 2014. That represents a potential $6 billion dollars of debt that credit card companies and banks no longer earn 29.99% interest on as the loans get paid off with a fixed term note. And all of this is just in the consumer loans arena. Lending Club is currently working on developing small business lending which would be an even larger threat for banks as they continue to develop a brand and gain traction in the lending arena.

      Thanks for stopping by JC and for the great comments/questions. As an aside, I would expect you will be able to invest directly into notes with Lending Club sometime in the very near future (once the IPO has occurred).

      • I’m not an expert on those regulations at all, but I know there’s plenty of them. Although if other banks haven’t followed suit then I guess this could be a strictly WFC thing.

        I had no idea they were doing that much in lending. $300M per month each is a huge amount. In light of those kind of stats I can see the worry by the big banks. Are any of the banks invested with LC/Propser? I saw you posted that WFC makes money through the LC Trust Account. I’m curious why the ban by WFC if they currently have a stake in the improvement of LC at least. I guess I could understand a no Propser investment if WFC only has ties with LC but why both? Unless it has something to do with the IPO process, but that doesn’t really make sense given that these are individual investors that have no ties to the companies but just use their marketplaces.

  3. It should be illegal for them to ban them from investing. Buying index funds may be buying the competition directly… buying stock of a rival bank is also a possibility… I believe the precedent it sets is just wrong and should be illegal for a company to dictate what an individual can invest in. I should be able to work at McDonalds and buy Burger King stock right?

    • I would imagine that it should be allowed, but I certainly don’t know the answer for sure. I think because they are privately held Wells Fargo has more of a leg to stand on, but I am just spitballing at this point. Something I am looking into for sure!

      Thanks for stopping by Steve!

  4. I wonder how are they going to enforce it. If you do not tell them, they have no chance to find out. Also if I were a WFC employee I would open my account on my wife’s name or my daughter’s name and WFC can go to hell.

    I understand that they are mad. Now they do not reap those juicy yields themselves so they are screaming.

    Also I am not sure this is legal and not sure it is a conflict of interest. What I am doing as a private person with my own money is my business and not WFC’s. I would consider it a conflict of interest if employees would direct potential clients to LC for example and thus WFC would lose them. But if I am investing my own cash in the evening at home, that’s bullshit. If my employer would do this I would hire a lawyer.

    • I think enforcement will be complicated, but limited how employees can invest is quite common in the world of finance. There is a tremendous amount of reporting requirements that folks already have to abide by so this isn’t entirely out of the realm. The biggest thing I take away from it is the fact that they consider Lending Club as a possible conflict of interest, or in other words, a competitor.

      Should be interesting to see how things shake out over the next six months. Thanks again for stopping by!

  5. I don’t work for WFC but I was banned from investing on prosper. They made me ride out my funded loans for the 3 years without investing in new ones lol. It was really annoying.

    I don’t remember the exact justification (it was over 3 years ago at this point) but it had something to do with being a registered rep and being involved in private deals that my broker-dealer couldn’t monitor.

    • Interesting! Do you mind if I ask who you worked for at the time? And riding them out must have been tremendously annoying. I can certainly appreciate limitations in the investment arena due to regulations, but to me, there is a difference between investing in notes versus owning equity in Lending Club.

      Thanks for stopping by Evan!

      • Still work for them so I don’t share, but it is a Fortune 100 insurance company of which I am a registered representative (although I have literally one client, The Wife).

        I actually think owning a piece of LC would have been alright as an outside business activity – the notes were unregulated instruments that home office compliance wasn’t comfortable with. Might have been my “fault” for sharing that I even had the account lol.

        In the same vain I actually am only allowed to use one of 10 brokerage sites (sites like sharebuilder, tradeking, etc are not on there)

        • I hope you tell her that she’s the best client you have!

          Interesting to learn how they might treat the notes differently than the company. That of course leads to the next questions, at what point do the notes become regulated and acceptable? Both Prosper and Lending Club file with the SEC and went through some heavy filing requirements to do so. Either way, lesson learned is right, don’t volunteer information! :)

          Very interesting as well on the limits to which brokerages you can use (must be due to the ability to monitor employee’s investments). I had heard of this before from a CFP friend of mine who has experienced some limitations in the past as well.

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