Former Securities Exchange Commission Chairman Arthur Levitt and two fintech executives squared off Thursday over whether fintech companies need stricter regulation and corporate governance.

"Fintechs tend to march to their own rules," he said at the Economist's Finance Disrupted conference in New York. "It's a new industry with lots of failures and lots of spectacular successes. But regulation is often kind of background music, and the prevalence of scandal and mismanagement and aggressiveness is part of the backwash of innovation."

Levitt did not single out any companies by name, but in the past two years marketplace lenders such as Social Finance (which he has advised) and Lending Club have come under fire for financial and other improprieties that lead to leadership changes.

"Hardly a day goes by where there isn't a recording of some scandal or another," Levitt said. "I think that's generally true of emerging cultures and emerging standards and cultures. That makes the odds of winning much less than in well established companies with better established cultures."

Prudent mix
Regulators should try to find a "balance between the imperatives of protecting markets and protecting investors as well as nurturing those companies that are being regulated with sensible, cost-effective guidance," former SEC Chairman Arthur Levitt says.

His fellow fintech panelists, Sarah Friar, chief financial officer at Square, and Scott Sanborn, CEO of Lending Club, both pointed out that established companies have had their own share of scandals.

"I lived through 2007 through 2009, and the large established companies did not come out in any way looking remarkable," Friar said. "As we grow, it's important that we're doing it within the right regulatory environment but that regulation doesn't become a laggard that stops what we all want, which is a much stronger, healthier economy."

She also pointed out that Square makes more than half its small-business loans to women-owned businesses. "We're totally disrupting and changing a system that has now allowed growth of the economy for small businesses to take off," she said.

Sanborn noted that sound corporate governance is a question for every company.

"It's not unique to fintech — I think the Wells Fargo story continues to play out," he said. "We do need to take responsibility in [Silicon Valley] where there is a mentality of growth at all costs, and if you don't have the right checks in place, the right kind of board in place, and plenty of people with audit and risk experience that are providing the right kind of governance, you can have problems."

Blame to go around
"It's not unique to fintech — I think the Wells Fargo story continues to play out," Lending Club CEO Scott Sanborn says of corporate governance issues.

Levitt said it's difficult for startups to attract the kind of quality board members that larger, more mature companies are able to attract.

"A potential board member has to be very careful," he said. "Going on a board is not a desirable thing to do. I would discourage friends or clients of mine from ever going on a board — any board. It isn't worth the risk." Levitt is currently on the boards of Bloomberg, Knight Capital Group and Motif Investing. He is also an adviser to emerging tech companies Mirror, BitPay, Blockchain, PeerIQ and SoFi.

Asked if regulation has kept up with the Fintech revolution, Levitt noted that regulation always trails the market.

"Regulators are always playing catch up," he said. "Regulation today trails the fintech world and often presents impediments and costs that are unnecessary. Regulators are constantly protecting their space so they don't get caught up in a scandal they're held accountable for, so there's a tendency to over-regulate."

They should try to find a "balance between the imperatives of protecting markets and protecting investors as well as nurturing those companies that are being regulated with sensible, cost-effective guidance that protects the companies and the investors," Levitt said.

Square is applying to the Federal Deposit Insurance Corp. for an industrial loan company charter, which would bring it in greater direct contact with regulators. The application is being made by its lending unit Square Capital, which is less than 10% of the company, Friar said.

"The more we can get face-to-face conversations, that's the right way to strike a balance," she said. "The ILC is a way for us to get closer to regulators, and we think that will speed up the pace of innovation."