Proposals for a EU regulatory framework for crowdfunding and peer to peer finance

Tour Eiffel - Robert Delaunay

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The European Union (EU), with regard to its aim to establish a Capital Market Union (CMU), has initiated, through the European Commission, a legislative proposal for the regulation of two very relevant issues of the EU, which are crowdfunding and crowdlending (in Spain known as plataformas de financiación participativa), and also peer to peer finance, which is a wider term that includes crowdlending and other financing platforms.

In Spain there is already a specific regulation for crowdfunding and crowdlending, while the peer to peer finance referred to other kind of platforms, such as promissory note and invoice discounting between individuals and non-financial entities, do not have a specific regulation, but continues to be regulated and overseen  by the Bank of Spain. However, in Spain peer to peer finance companies can outsource a payment entity authorized by the Bank of Spain, avoiding its requirement of authorization to operate as a payments entity.

This initiative will be developed over the next year 2018, and will face significant challenges, because each member state is regulating this subject with different approaches. Due to this situation, it was expected that the EU would try to establish a common framework to harmonize the regulations emerging, and also ensure the companies operating in this field may have the chance to work across all the EU. Due to the absence of this harmonization, at this moment crowdfunding and peer to peer finance companies are very focused on a national level.

During four weeks any interested party can submit comments. For this purpose you can visit this Link.

The European Commission has identified four alternatives on how to approach the regulation of crowdfunding and peer to peer finance:

Not legislating: Although the initiative clearly shows that this approach is not desirable, especially because it harms companies’ growth and the CMU, it is considered a possible alternative to be taken into account. In this sense, each member state would be able to regulate crowdfunding and peer to peer finance at its sole discretion. Therefore, the Commission would act as a mere mediator and supervisor, with the purpose to promote the harmonization of the national legislations. I think this alternative would be an error.

Self-regulation with minimum EU standards: In this case, the Commission would conduct a study of the measures implemented throughout the EU, identify the measures it considers most appropriate and prepare a non-binding recommendations on good practices. Therefore, it responds to the not legislating alternative, but with the aim to create a reputational EU framework for Fintech.

Harmonization of regulations in the EU: In this case, the EU would create a single regulatory framework, in which crowdfunding platforms would be considered as regulated markets or payment entities. Therefore, companies engaged in these activities would require a prior license from the EU to operate. In addition, this alternative includes a second way, consisting of a minimum EU framework. Nowadays this alternative is still viable, however, over time its implementation will be more complicated to be completed.

EU regulations only applicable to cross-border transactions: The last and fourth alternative identified is referred to maintaining the national legislation of each member state, applicable only to companies operating on a national level. However, in case of cross-border aspects involved, national legislation would be left out and the opt-in by the company to the EU regulations would be required. Therefore, each company could decide if opt-in the EU laws, acquiring the license to operate throughout the EU CMU or, stay limited to the national level, in which case the national legislation would apply to it, excluding the EU rules on crowdfunding and peer to peer finance.