As part of the priority task to establish the Capital Market Union (CMU), and broaden access to finance for SMEs with a focus on start-ups and scale-ups, European Commission (EC) has announced plans to draft a proposal that would regulate crowdfunding and peer-to-peer lending market in the European Union. EC aims to finish this project in the first quarter of 2018 and has already published an Inception Impact Assessment in order to inform and get feedback from interested stakeholders, that now have until November 27, 2017, to submit their comments. All related companies and other stakeholders are welcome to give their feedback on the proposal here.
EC states that despite the impressive development of the European alternative finance market over the past few years according to data and statistics from ”Sustaining momentum, the 2nd European Alternative Finance Industry Report” published by the University of Cambridge Judge Business School the growth rate slowed down by 10% in 2015. It’s also evident that in the global perspective the European market with a value of €5.4 billion is still relatively small if compared to the Americas where the market value has reached €33.6 billion and the Asia-Pacific region with the €94.6 billion alternative finance market. The dimension of the market represents one of the main problems that this initiative aims to solve, which to be more specific are:
– Market fragmentation and the lack of scale
Little or no cross-border activity, regarding foreign investments in crowdfunding platforms, is indicated as one of the main issues impacting scalability. That may be partly attributed to the differences in national regulations, which cause among other things, an increase in transaction costs.
– Lack of reliability to crowdfunding and peer-to-peer platforms
Security and reliability are considered critical elements affecting the future growth of the whole industry. The primary concern is governance practices regarding risk management or misalignment of interests, as well as lack of sufficient information for the investors about the projects or platform’s operations. Regulation practices vary from country to country, and there is no unified view on how requirements for ensuring an adequate disclosure terms must be defined.
The primary policy objectives are directly related to the current problems and are delaying cross-border scaling and failing to provide platforms with an effective risk management framework.
With this legislative proposal, EC evaluates, in particular, four policy options:
Option 1: Baseline scenario – no EU framework
In this scenario, EC would maintain regular meetings with all stakeholders to share the best practices and keep the development of the industry under review.
Option 2: Building on reputational capital – a self-regulatory approach with minimum EU standards
Mapping best practices and local regulatory framework with the aim to prepare a set of non-binding minimum standards and best practices.
Option 3: A comprehensive EU approach – treating crowdfunding platforms like regulated trading venues or payment institutions
Introduction of an EU framework for crowdfunding into existing regulation covering financial services, with specific provisions to regulate crowdfunding platforms, allowing companies to request a crowdfunding license to operate across the Single Market.
Option 4: The cross-border solution – a standalone opt-in EU framework
Specific EU regime that platforms looking to do cross-border activity could opt into, leaving, in this case, unchanged the rules for all the other platforms.
At least theoretically, it’s easy to think that an EU framework would help to overcome the fragmentation of national markets, encouraging the development of a broader European market, applying a more precise legislative framework to regulate it. It will take some time to see where this initiative will go, but the level of interest shown and the growth of the industry is something that makes us very optimistic about the future of the alternative finance market in Europe.