Following on from the advice and the opinion of the European Securities and Markets Authority ("ESMA") on investment-based crowdfunding in December 2014, the European Banking Authority (the "EBA") issued its opinion on lending based crowdfunding in February 2015 (the "Opinion").
"The EBA has identified crowdfunding - in particular lending based crowd funding - as a new form of financial activity that falls within its area of competence."
The EBA has focused on the assessment of risks arising for market participants as well as the drivers of these risks and the extent to which these could be addressed in existing EU or national legislation.
The Opinion is addressed to the EU Commission, Council and Parliament with a view to achieving a coordinated approach to the regulatory and supervisory treatment of crowdfunding.
Following an analysis of lending based crowdfunding including the various business models, the risks to borrowers and lenders, regulatory measures to address the risks and the applicability of EU legislation the EBA came to the following conclusions:
- That the convergence of practices across the EU for the supervision of crowdfunding is desirable in order to avoid regulatory arbitrage, create a level-playing field, ensure that market participants can have confidence in this market innovation and contribute to the single European market.
- The EBA considers that at this stage, this convergence should be based on existing EU law and recommends that EU legislators provide clarity on the applicability of said law to lending-based crowdfunding.
- Should the legislators consider developing a possible regulatory framework the EBA proposes several regulatory measures which should be taken, in particular in relation to:
> the lack of or insufficient information regarding lenders' and borrowers' rights, duties and risks;
> a lack of or insufficient requirements on any due diligence process and assessment of borrowers' creditworthiness conducted by a platform;
> a lack of or insufficient requirements on platforms complaints handling procedures;
> a lack of or insufficient internal platform procedures (relating to document handling processes and records setting);
> a lack of or insufficient safeguards against platform default; and
a lack of or insufficient project safeguard clauses.
- The Payment Services Directive is the directive that is most feasibly applicable to lending-based crowdfunding activities. However lending related aspects are not covered by EU law leaving several risks unaddressed. The EBA also considers that there is a need for the EU legislators to provide clarification of certain matters in the Payment Services Directive including the scope of the distinction between "regular" and "main" activity, the application of the exemptions listed in the directive and the definition of payment services.
- The business models of lending based crowdfunding platforms do not fall inside the perimeter of credit institutions and their typical business model.
The EBA will continue to monitor the market and will revise its conclusions as and when required.