Tuesday, May 10, 2016

EC sees no current need for EU-level crowdfunding regulation

By John Filar Atwood

The European Commission has concluded that crowdfunding in the EU remains relatively small and local so there is no need at the moment for an EU-level regulatory framework for the crowdfunding sector. However, the EC acknowledged that the industry is growing rapidly and pledged to review developments at least twice a year to determine if it needs to take steps to support regulatory convergence in this area.

As part of its capital markets union action plan, the EC published a report on the EU crowdfunding sector. The EC believes that if it is appropriately regulated, crowdfunding has the potential to be a key source of financing for small and medium-sized entities (SMEs) over the long term.

The Commission notes in the report that member states have begun to put in place national frameworks to support the growth of crowdfunding and to ensure that investors are protected. The national frameworks are broadly consistent in terms of the objectives and outcomes they seek to achieve, the EC said, but are tailored to local markets and domestic regulatory approaches.

In a press release, EU Commissioner Jonathan Hill emphasized that the EC supports the development of crowdfunding models as a source of financing for entrepreneurs, start-ups and other SMEs. The Commission’s focus is on promoting best practice, appropriate investor protection and consistency of national regimes, he said.

Crowdfunding numbers. According to the report, approximately €4.2 billion was successfully raised through crowdfunding platforms in 2015 in the EU, compared with €1.6 billion in 2014. Crowdfunding projects were present in all member states, but activity is currently concentrated in a small number of member states. The U.K. has by far the largest amount raised and number of projects funded through crowdfunding, the report states.

The report indicates that cross-border project funding is still limited and crowdfunding remains a regional or local phenomenon to a large extent. Several member states have already introduced or are planning to introduce domestic custom regimes on crowdfunding with rules aimed at supporting the development of crowdfunding while addressing risks that may arise for investors.

Member state regulation. One purpose of the report is to assess national crowdfunding regulatory regimes and identify best practices. To date, seven EU member states have introduced custom regulatory frameworks for crowdfunding activities, with requirements for issuers/borrowers, platforms, and investors/lenders. In addition, the report notes that a number of member states are either preparing or planning to introduce a regulatory system.

The U.K. has the most developed market for peer-to-peer lending, according to the report, with a trade association representing 90 percent of the lending market. The trade association’s members must apply operating principles setting out the standards of business conduct, such as clarity and transparency, including on bad debt rates, returns performance and full loan book availability, risk management and reporting. These align with, and in some areas supplement, requirements of the U.K. Financial Conduct Authority, the report notes.

Data protection. The report states that in crowdfunding there is likely to be significant processing of personal data. Consequently, the rules of the Data Protection Directive will apply to platforms and issuers/borrowers. For example, data controllers should ensure that all data protection obligations are met, including right of access of individuals to their personal data.

The report notes that the Data Protection Directive has liability and compensation provisions for unlawful processing of or incompatible acts relating to the processing of personal data, which are separate from the other liability regimes. The report suggests that crowdfunding platforms need to ensure the awareness of and compliance with the obligations for data controllers and data processors and the rights of individuals.

According to the report, in addition to regulatory frameworks put in place by governments, several industry associations have introduced systems of self-regulation for crowdfunding. These include codes of conduct which may set minimum requirements and best practices for platforms in terms of transparency and good business conduct.

Guiding principles. The report indicates that the European Crowdfunding Network has published some guiding principles as its code of conduct for observation and application by its members and the European crowdfunding industry at large. The guiding principles are: act with integrity and in fairness; keep your promises; disclose conflicts of interest; foster data transparency; maintain confidentiality; do not harm the industry, society or environment; and use, at all times, adequate and appropriate human and technical resources that are necessary for the proper management of a crowdfunding platform. The Code of Conduct also sets out specific compliance procedure, such standardized information sheets and reporting requirements, the report notes.

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