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European Banking Authority recommends convergence in crowdfunding legislation

02 Mar 2015, 10:18 am

EU legislators need to clarify how existing EU law applies to lending-based crowdfunding, the European Banking Authority (EBA) has said.

The clarification is necessary to give crowdfunding platforms and the businesses that use them confidence over the future of the market, it said.

In an opinion addressed to the European Commission, the European Parliament and the Council of Ministers, the EBA identified risks to the sector and looked at how they can be addressed (40-page / 399KB PDF) in the EU legislative framework.

In order to offer a level playing field to participants across the EU, and to avoid "regulatory arbitrage", the EBA said that regulations should be based on existing EU law and that EU legislators must clarify how it is to be applied.

The EBA has a mandate to monitor "new and innovative forms of financial activities" with a view to determining the risks to participants, which in this case includes lenders, borrowers and platform providers, it said. It had therefore looked at the regulations needed to bring confidence to this market, by reviewing present business models and looking at how risks are already addressed in existing EU and national laws and regulations.

The Payment Services Directive is the most readily applicable EU legislative text to the payment-based aspects of crowdfunding, the EBA said. However, lending-related aspects are not covered because crowdfunding platforms do not fall within the definition of 'credit institutions' under EU law. This leaves several risks that need to be mitigated, including a lack of, or insufficient requirement for, due diligence processes and assessment of borrowers' creditworthiness, and a lack of safeguards against default by platforms, the EBA said

The EBA suggested ways to address these risks, including requirements for due diligence procedures on projects that are advertised on a crowdfunding platform, measures to strengthen internal procedures and ways to tackle platform defaults.

EU regulators specifically need to look at three issues relating to the Payment Services Directive, the EBA said: the scope of the distinction between 'regular' and 'main' activity, to ensure common interpretations; the application of the exemptions listed in the directive, particularly the use of commercial agents; and the definition of 'payment services'.

The EBA "stands ready" to help EU institutions in their work, it said.