The European Crowdfunding Service Provider Regulation (ECSPR) establishes a tailored framework for Crowdfunding Service Providers (CSPs), distinguishing them from traditional financial institutions and Non-Bank Financial Intermediaries (NBFIs). This distinction is crucial in understanding CSPs’ role within the financial ecosystem; CSPs are regulated by a bespoke European Law.
The Position of CSPs under the ECSPR
The ECSPR provides a comprehensive regulatory framework for CSPs, emphasizing transparency, investor protection, and operational requirements. CSPs operate platforms that connect investors directly with projects, without taking deposits or issuing loans—key factors that differentiate them from traditional banks and NBFIs.
Unlike traditional financial institutions, CSPs are not classified as financial institutions under the ECSPR. This legal distinction is important because it recognizes that CSPs, while engaged in financial intermediation, operate differently from banks, credit unions, and other traditional financial entities. The regulation ensures that CSPs are subject to oversight that is tailored to their unique operational model, avoiding the potentially burdensome requirements associated with being categorized as NBFIs.
European Commission’s Approach to NBFIs and Potential Impact on CSPs
In May, the European Commission launched a targeted consultation to evaluate the macroprudential oversight of NBFIs, aiming to identify vulnerabilities and risks within this sector. Although the Commission is not currently pursuing new laws specifically targeting NBFIs, the consultation seeks to determine whether adjustments to existing laws are necessary to address emerging risks. This approach implies that sectors identified as NBFIs could face regulatory changes tailored to their specific risks.
While CSPs have not been specifically mentioned in the context of this consultation, there is a concern that as the crowdfunding sector grows, CSPs could be indirectly affected by broader regulatory adjustments aimed at NBFIs. For instance, if the Commission determines that certain risks associated with financial intermediation also apply to CSPs, they might impose additional regulatory requirements on these platforms, despite the ECSPR already providing a specialized framework.
Could CSPs be considered NBFI
Crowdfunding Service Providers can of course be conceptually classified as Non-Bank Financial Intermediaries because they:
- Engage in financial intermediation by connecting fundraisers and investors.
- Operate under a regulatory framework that governs their activities.
- Do not take deposits, similar to other NBFIs.
However, whether they are considered as NBFIs may vary based on specific contexts. The key is understanding their functional role in the financial ecosystem, which aligns them with the broader category of NBFIs despite their limited direct involvement in transactions. In line with this is the welcome inclusion of ECSPR into regulatory frameworks such as DORA. An opposing argument could be the exclusion of consumer loan crowdfunding from the CCD, which clarifies that crowdfunding credit provision by financial institutions, including Non-Bank Financial Institutions, is subject to CCD, but not crowdfunding through crowdfunding platforms. The decision to classify Crowdfunding Service Providers (CSPs) as NBFIs involves balancing several factors, including regulatory oversight, market integrity, consumer protection, and the operational characteristics of CSPs-but most of all likely scale and trading volumes.
Why CSPs Should Remain Distinct from NBFIs
The ECSPR already offers robust oversight that addresses the specific risks associated with crowdfunding, ensuring transparency, investor protection, and operational integrity. Regulatory frameworks in place for NBFIs could are in many cases less strict and, one could argue, carry a much larger risk already from the regulatory point of view. Furthermore, CSPs’ operational model—facilitating direct connections between investors and projects without holding deposits or issuing loans—does not align with the typical activities of NBFIs. Therefore, while CSPs do engage in financial intermediation, their distinct characteristics warrant a separate regulatory approach. This is why they were regulated under a harmonised European Law, in their own right next to the Banking sector.
Looking Ahead
As the European Commission continues to monitor NBFIs, CSPs should advocate for the continued recognition of their unique role within the financial ecosystem. This could ensure that any future regulatory adjustments do not inadvertently impose undue burdens on CSPs, allowing the sector to continue fostering innovation and providing alternative financing solutions. While the European Commission’s ongoing assessment of NBFIs is crucial for financial stability, it is important to maintain a clear distinction between CSPs and traditional NBFIs. The ECSPR offers a well-tailored regulatory framework for CSPs, and any future regulatory considerations should respect the unique nature of crowdfunding platforms, supporting their role in the broader financial landscape without subjecting them to inappropriate regulations.
