Last week during the 4th ECN Crowdfunding Convention,the Chair of ESMA, Steven Maijoor, has given an interesting keynote speech on Capital Markets Union and crowdfunding. We interviewed him to get a clearer picture of ESMA’s position in regards to crowdfunding. Here what he told us.
What are currently the biggest political priorities of ESMA in terms of financial regulation ? 2/ In the Capital Markets Union, which are, according to you, the market segments that are the most difficult to harmonize at EU level?
The Capital Markets Union (CMU) will be one of the forces shaping the future of Finance in Europe, and a key topic to take into account when considering the opportunities and challenges in the investment landscape. One of the key aims of the CMU is to create a balanced funding system that maximises the benefits of capital markets and is less reliant on funding by the banking sector. The foundations of this ambition are currently being built, and ESMA’s main objectives, of enhancing investor protection and promoting stable and orderly financial markets, are fully aligned with the objectives of the CMU. A successful CMU based on a single capital market in the EU would promote the attractiveness of the EU for investors, which should in turn create more jobs and stimulate economic growth. The objectives of the CMU imply also attracting retail investors to more actively participate in the financial marketplace. This reinforces the relevance of ESMA’s existing investor protection framework, because investor trust is crucial to meeting this aim. Only when investors feel sufficiently confident will they be willing to enter financial markets. A high level of investor protection and increased supervisory convergence are both key to reduce barriers and fragmentation between national capital markets, and to achieve the ambitions of the CMU – this goes for the EU’s securities markets but also cross-sector including banking and insurance.
Which challenges and opportunities do you see for crowdfunding in the framework of the CMU ?
Through the CMU initiative we want to harness the full range of alternative sources to bank funding and facilitate the development of a larger and a more interconnected capital market across the EU. We recognise that there is a risk of over-regulating emerging channels, or regulating them inappropriately. However, we are concerned that a fragmented regulatory landscape could prevent crowdfunding from reaching its full potential. An important message from the Opinion that we published in December 2014 is that the regulatory burden under legislation such as MiFID need not be as great as some in the industry seemed to think at the time. Our Advice to the EU institutions, published at the same time, highlighted our concerns that strong incentives currently exist for crowdfunding platforms to structure their business to fall outside the scope of regulation and note that one important driver for this seems to be the current rules on prospectuses. We advised the institutions to consider possible policy options to reduce these incentives. Since then, the policy debate and our own work has moved forward. The Commission has published its CMU Action Plan and committed to publishing a report on the development of crowdfunding in 2016, which we await with interest. Meanwhile, the Commission is preparing its proposal for revision of the Prospectus Directive. ESMA responded to the earlier Commission consultation on both points.
Because crowdfunding has the potential to improve access to finance for the real economy and to widen the investment opportunities available to non-institutional investors, it needs to be seen in the context of the Commission’s programme of work on the Capital Markets Union. A harmonised approach would also ensure a level playing field, which we are currently lacking in this area. We believe that there is a need for having the same rules applicable to everyone as this will ultimately benefit investors and providers alike.
You have delivered a keynote speech for the opening of the 4th ECN Crowdfunding Convention in Paris on October 29th, what are your main messages for the crowdfunding industry ?
ESMA’s aim is to enable crowdfunding to reach its potential as a source of finance, while ensuring that risks to users of crowdfunding platforms are identified and addressed in a proportionate and convergent way across the EU. We believe that there are benefits both for investors as well as for platforms by operating inside rather than outside the regulated space. Unfortunately, some features of the market that gave us concern when we prepared the Opinion and Advice have continued since then. Part of the market seems to be operating quite successfully within the scope of regulation. However, we remain concerned that a number of platforms appear to be making significant efforts to stay outside of regulation. One reason for our concern is that we do think that there are important risks to investors in investment-based crowdfunding, as there are in other financial services businesses. The discipline of being regulated can help firms to manage these risks more effectively than they would otherwise. Being authorised under EU rules also provides a passport enabling platforms to operate all across Europe without needing any further authorisation. We are therefore concerned that platforms’ avoidance of regulation not only presents risks to investor protection but makes it harder for platforms to grow their business. We are also concerned that a growing number of Member States are implementing national regimes to regulate crowdfunding, which do not provide for such a passport. While these regimes may address some of the risks specific to crowdfunding, they pose challenges for a level playing field and regulatory and supervisory convergence. They could also make it harder for platforms to achieve the scale that they need.