As part of our ongoing work to help shape the Capital Market Union, on which the European Commission published its most welcome Mid-term review of the capital markets union action plan, ECN engaged with regulatory authorities and policy makers around Europe, we hosted an expert panel in Brussels on the 21st of June 2017, where various equity (securities) and online lending platforms, together with other relevant stakeholders from the ecosystem, including customer protection advocates and the European Commission, discussed key barriers for cross border transactions.
The panel was held to evaluate the effectiveness and degree of convergence of national regulatory frameworks, convergence, sharing of best practice and investor protection aspects. There were two main themes: operational obstacles to cross-border activity and consumer protection. It is interesting to note how, despite having different business models, the groups voiced several similar barriers to the growth of their businesses in Europe.
Heterogeneity of national regulations. Different national legal frameworks, as well as local fiscal regimes, are said to making international expansion difficult: legal compliance with each country’s rules is costly and burdensome. Additionally, room for interpretation within European directives and laws at Member State level creates further levels of complexity to those trying to operate cross-border.
Knowledge and understanding. The aspects pointed out here were twofold: on the one hand, a lack of knowledge of alterative finance business models among the national regulators was highlighted, which creates uncertainty (lack of appropriate rules) or hinders the professional development of the market (detrimental rules). On the other hand, the participants reported perceived limitations in financial literacy, the understanding of finance, among European citizens, which restricts the choice of adequate services offerings and is limiting the engagement of consumers.
Best practices and industry’s standards. Differences on Member State level in know-your-customer rules, data disclosure, due diligence and measurements of returns are posing relevant challenges to the sector in terms of standardisation and transparency. Addressing these elements will be crucial to gain more trust from the public and develop crowdfunding further
ECN aims to gather further relevant input from market players via this survey before the 7th of July.
The European Commission is currently looking to further shape financial technology (FinTech), which in the words of the European Commission is “transforming capital markets by bringing new market players and more efficient solutions, increasing competition, and lowering costs for businesses and investors. Examples of financial innovations that can make the EU capital markets broader and deeper include: crowdfunding and other alternative funding tools (…) and the possible application of block chain technology (…).”[i] Within the Capital Market Union mid-term review the EC has set itself the target to communicate by the end of 2017 on more proportionate rules and support for cross-border business, to facilitate entry by non-bank entities, to increase competition, to provide new solutions for capital markets and to decrease costs.[ii]
Crowdfunding is a vital part of the European Capital Market Union with regard of three major goals as expressed by the European Commission, namely:
- European start-up and scale-up firms need more risk finance to invest in innovation and growth. There is a need to develop and strengthen new forms of emerging risk capital alongside bank credit.
- Engagement by retail investors with capital markets remains low. EU households are amongst the highest savers in the world, but the bulk of these savings are held in bank accounts with short maturities. More investment into capital market can help meet the challenges posed by population ageing and low interest rates. This, however, will not happen unless retail investors have access to attractive investment propositions on competitive and transparent terms.
- Many long-standing and deep-rooted obstacles stand in the way of EU cross-border investment, undermining the efficiency of the EU economy. Barriers deter investors from diversifying their portfolios geographically, reduce market liquidity, and make it harder for companies to scale up.
ECN invites knowledge exchange with market players via local or online focus groups (please contact us at firstname.lastname@example.org ) to enrich relevant desk and market research.
ECN welcomes the statement of the European Commission about Crowdfunding and other FinTech sectors. We believe that under adequate rules and guidelines, the sector can offer solutions and functions. We also welcome the planed actions of the European Commission regarding clearer rules on ownership of securities and claims, to remove uncertainty about applicable law, to reduce costs and risk and to promote cross-border transactions.