Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee
(a) Proposal for a Regulation on European Crowdfunding Service Providers (ECSP) for Business; (b) Proposal for a Directive amending Directive 2014/65/EU on markets in financial instruments with respect to crowdfunding.
Article 114 TFEU; ordinary legislative procedure; QMV
(a) (39550), 7049/18 + ADDs 1–3, COM(18) 113; (b) (39551), 7048/18 + ADDs 1–2, COM(18) 99
5.1Crowdfunding is a relatively new form of financing, where an online platform or intermediary connects investors—often individual savers—with counterparts looking for funding. It is used by both consumers and businesses to access loans. British platforms are currently by far the most prolific European crowdfunding ‘hubs’: of the €4.2 billion (£3.6 billion) raised through crowdfunding in the EU in 2015, 80 per cent was raised in the UK.
5.2As part of the EU’s “Capital Markets Union” (CMU) project, the European Commission in March 2018 to create an EU-level regulatory framework for investment- and loan-based crowdfunding platforms that provide funding for businesses (but not consumers).
5.3This Regulation as proposed would create an optional “European Crowdfunding Service Provider” (ECSP) label, providing platforms from any Member State with a ‘passport’ allowing them to solicit investments from investors in any other EU country (without needing to seek country-by-country authorisation or licences). If they did not want to operate across EU borders, platforms could remain within the pre-existing national regulatory framework applicable in their home country. Under the original proposal, obtaining the ECSP label would require a platform to meet certain prudential, organisational and consumer protection requirements set out in the Regulation, and secure authorisation from the European Securities and Markets Authority (ESMA) in Paris. Moreover, the new EU ‘passport’ would not be applicable to any crowdfunding projects seeking to raise more than €1 million (£880,000), which is the point at which EU law normally requires a formal prospectus to be issued to prospective investors.
5.4The European Commission envisaged the Regulation would take effect in 2020, provided it was adopted in time by the Member States in the Council and by the European Parliament.
5.5The Government deposited the Commission proposal for parliamentary scrutiny in spring 2018, around the same time that the first draft of the Withdrawal Agreement on the UK’s exit from the EU was published by the European Commission. This foresaw a post-Brexit transitional period, beginning on 29 March 2019 and ending on 31 December 2020, during which the UK would stay in the Single Market and Customs Union to avoid a change in the terms of the UK’s trade with the EU-27. To achieve this, the UK would have to continue applying EU legislation during the transitional period, including new European laws that only take effect during the transition.
5.6In his on the Crowdfunding Regulation of 27 March 2018, the Economic Secretary to the Treasury (John Glen MP) expressed the Government’s support for efforts to increase the reach of crowdfunding platforms across the EU. However, the Treasury had concerns about the substance of the Commission proposal (including the need to differentiate between investment- and loan-based crowdfunding, given their different business models; ensuring companies cannot use a ‘lighter touch’ ECSP regime to escape stricter domestic regulation when offering crowdfunding services; a larger role for domestic regulators in supervising the new regime; and the inclusion of proportionate prudential requirements for crowdfunding platforms as a pre-condition for their authorisation as an ECSP).
5.7The Committee considered the proposal for the first time at its meeting , noting that the impact of the new Crowdfunding Regulation on UK firms was likely to depend largely on the future UK-EU agreement on financial services, because:
5.8The Committee drew the proposal to the attention of the House, and of the Treasury Committee in particular, and asked the Minister “whether the Government intends to push for the inclusion of an equivalence regime under the Regulation, so that the UK—if necessary—could apply to stay part of the ESCP regime after it leaves the Single Market (if such market access cannot be secured through a bilateral trade agreement)”.
5.9Since we last reported the proposed Regulation to the House, a number of important political developments have taken place in the UK’s process of withdrawing from the EU:
5.10In parallel, there have also been substantive developments in the legislative negotiations on the Crowdfunding Regulation. Based on information provided by the Economic Secretary to the Treasury in letters dated , and , we have set out the respective positions of the Member States in the Council and of the European Parliament below. Further down, we have assessed the potential implications of the Regulation for the UK in the context of the Brexit process.
5.11The Crowdfunding Regulation is subject to the ordinary legislative procedure, meaning it has to be adopted jointly by the European Parliament and a qualified majority of Member States in the Council.
5.12The European Parliament’s Economic and Monetary Affairs Committee, which leads the Parliament’s negotiations on the Regulation, adopted its on 5 November 2018. This was subsequently by the Parliament as a whole during its Plenary Session on 27 March 2019. Although the MEPs’ position was adopted prior to its dissolution for the EU elections in May 2019, the new Parliament is likely to pursue negotiations based on this mandate when talks with the Member States begin in autumn 2019.
5.13Among other changes, MEPs wanted to significantly raise the value limit on calls for finance that could be issued by platforms with the ECSP label under the Crowdfunding Regulation. Under their proposals, this threshold would rise from the Commission’s suggestion of €1 to €8 million (given that the new —which took effect in July 2019—allows public offers of up to €8 million to be made without a formal prospectus). In addition, the Parliament wanted platforms to be required to disclose the rate at which their borrowers default on loans, so investors can more accurately assess the risks of investing their money.
5.14Extensive discussions between the EU’s Member States on the Crowdfunding Regulation also took place since early 2018.
5.15The Economic Secretary provided a first update on discussions among Member States on the Regulation , in which he explained that national governments wanted authorisation for use of the ECSP label to be the responsibility of national financial regulators, rather than ESMA. Many of them also, like the European Parliament, wanted to increase the €1 million limit for individual crowdfunding projects (above which a platform could not use its passport to seek funds from investors in other Member States). It appeared the Government’s other concern, in particular the need to have different regulatory regimes for investment—and loan-based crowdfunding platforms, and the need for a basic prudential framework, or access to the framework by non-EU platforms, had not yet been discussed in the Council working party at that stage.
5.16Five months later, in December 2018, the Economic Secretary on the negotiations on the Crowdfunding Regulation. This explained that “the direction of travel among the majority of member states is towards changing the proposal into a minimum-harmonising Directive, rather than an opt-in Regulation”. This would mark a substantial shift in the EU’s regulatory approach to crowdfunding, as it would mean there would be no optional EU-wide ‘label’ for which platforms could apply to operate throughout the Single Market. Instead EU legislation would set a regulatory baseline for all crowdfunding activities, whether they are conducted cross-border or purely domestically.
5.17The Minister’s letter did not indicate whether the UK supports this change of approach, but it did note that the Treasury’s “focus remains on ensuring that EU rules do not impact on the competitiveness of the UK’s crowdfunding sector”. We asked for further clarification of the Government’s position on this shift in the discussions, and whether the issue of ‘equivalence’—potentially allowing UK crowdfunding platforms to operate in the EU post-Brexit—had featured in the negotiations and requested a response by 31 January 2019.
5.18However, the Minister did not in fact reply to our questions . At that point, he informed us that the Member States in the Council—via their Permanent Representatives in COREPER—had approved a with the European Parliament on the final text of the new legislation on 26 June. The Council’s position maintained the proposed shift to harmonising legislation, which would “automatically apply to those platforms carrying out in-scope crowdfunding activities”, rather than the original proposal of an opt-in Regulation (where firms would opt-in to the EU legislation should they wish to operate cross-border). Moreover, it maintained the use of a Regulation—rather than a Directive—as the chosen legal instrument, leaving less room for national flexibility if the legislation is adopted in this form.
5.19The Minister explains that, if the Council’s approach is also endorsed by the European Parliament, “all Member States would be required to adopt the EU-wide rules contained in the proposal” and “allow platforms to operate in other Member States under a largely uniform regulatory framework, and investors to invest in platforms across the EU”. However, only certain types of crowdfunding would be in scope, and individual EU countries would “retain the ability to choose how certain elements of the Regulation will apply”. For example, they would be able to choose whether to apply a monetary limit or relative restriction on the maximum amount that ‘non-sophisticated’ retail investors can invest in individual crowdfunding projects. The Council’s position also sets out “significant prudential requirements that mean platforms will need to hold buffers to protect against operational risk”, and introduced a reflection period for non-sophisticated investors (including a right to withdraw from an agreement to contribute to a crowdfunding offer within seven days).
5.20The Minister indicates the UK Government is supportive of the approach taken by the Council to re-draft the proposal as a minimum-harmonising Regulation, “in order to prevent regulatory arbitrage between national and EU-wide rules, and to allow the [UK] Financial Conduct Authority (FCA) to more easily monitor and administer these rules”. Whether or not the legislation will impact on the UK’s regulatory framework for crowdfunding depends on the wider Brexit process (see paragraphs 0.24 to 0.25 below). Other Member States appear to be much less supportive of the compromise text, with Austria and the Czech Republic in particular for crowdfunding platforms without cross-border activities to be excluded from the scope of the Regulation (and therefore regulated solely by national law).
5.21The new European Parliament was elected in May 2019, and will not fully resume its legislative activities until autumn. It is expected that the Parliament will carry over the position on the Crowdfunding Regulation adopted by its predecessor in April, and use this as a basis for negotiations with the Member States on the final text of the legislation. It is not yet clear at this stage when those ‘trilogue’ negotiations might start and finish, and consequently when the new Regulation is likely to take effect.
5.22We thank the Minister for his detailed update on the negotiations around the EU’s Crowdfunding Regulation. The Government is clearly supportive of the new approach taken by the Member States in setting a minimum regulatory baseline for all crowdfunding platforms across the EU, and the Minister reassures us that the Regulation as re-drafted within the Council—and provided it is also accepted by the European Parliament—“would not pose significant practical disruption to the continued regulation of platforms” in the UK. We also welcome the exclusion of consumer lending from the scope of the Regulation, preventing the possibility of crowdfunding platforms circumventing existing consumer credit laws.
5.23We note that the potential application of the EU Crowdfunding Regulation in the UK, once agreed between the Council and the Parliament, will depend primarily on developments in the process of our withdrawal from the European Union.
5.24Since the Committee last reported the proposal to the House in April 2018, the finalised Withdrawal Agreement was published. As drafted this provides for a transitional period, potentially lasting until the end of 2022, during which EU law would continue to apply. That would include the new regulatory framework for crowdfunding platforms if it takes effect during the transition (a distinct possibility if the Regulation is approved by the end of 2019). Similarly, the Regulation could apply in the UK if Article 50 was revoked, or if the negotiating period—during which the UK remains a full Member State—was again extended beyond 31 October.
5.25After the end of any further extension or transitional period, or in a ‘no deal’ scenario (where there is no ratified Withdrawal Agreement and therefore no transition period), the Crowdfunding Regulation would by default not apply to the UK. Parliament would then be free to regulate this sector without reference to EU law if it so chose. However, given the dominance of the UK’s crowdfunding industry, access to the European market post-Brexit is likely to remain a commercially attractive prospect.
5.26When we last considered the Crowdfunding Regulation in January 2019, we asked the Economic Secretary to clarify if there was any appetite among the remaining Member States to introduce an ‘equivalence’ regime comparable to those provided for by other pieces of sectoral EU financial services legislation. Equivalence could allow non-EU platforms—including British ones after Brexit—to provide crowdfunding services within the EU, without having a subsidiary or legal presence within the EU itself.
5.27In his letter of 11 July 2019, the Minister confirmed that “there has been no interest expressed” for such an equivalence mechanism in the Crowdfunding Regulation in the Council, because “the objective for many Member States has been to protect their smaller sectors”. The implicit reasoning is that these countries do not want to open their domestic markets to UK competitors after Brexit, given Britain’s dominant share of the European crowdfunding sector. As such, after the UK leaves the Single Market, British crowdfunding websites would not be able to make use of any new ‘passporting’ arrangements under the Regulation, even if the UK’s regulatory approach to crowdfunding was completely aligned with the EU’s. Instead, UK platforms would have to establish a subsidiary within one of the remaining Member States to obtain a platform and provide services in multiple EU countries on a cross-border basis under the new Regulation.
5.28More generally, we have concluded that the final outcome of the legislative deliberations on the Crowdfunding Regulation remains unclear, because the European Parliament adopted its position on the basis of the Commission’s original ‘opt-in’ system. In light of the substantial divergence in the negotiating positions of the Council and the European Parliament, and the uncertainty about the potential application of the final legislation in the UK in the context of Brexit, we have decided to retain the proposals under scrutiny. We ask the Minister to inform us in due course of any significant progress in the trilogue negotiations, and draw these developments to the attention of the Treasury Committee.
(a) Proposal for a Regulation on European Crowdfunding Service Providers (ECSP) for Business: (39550), 7049/18 + ADDs 1–3, COM(18) 113; (b) Proposal for a Directive amending Directive 2014/65/EU on markets in financial instruments with respect to crowdfunding: (39551), 7048/18 + ADDs 1–2, COM(18) 99.
39550, 7049/18 COM(2018) 113: See the Twenty-fifth Report HC 301–xxiv (2017–19),(25 April 2018).
16 The most common forms are peer-to-peer lending or loan-based crowdfunding, where businesses or consumers are provided with a loan and the investors receive debt repayments, and investment-based crowdfunding, where investors bet on a business generating a cash flow in the future by buying investments such as shares or debt securities.
17 The ECSP label would not apply to peer-to-peer lending to consumers, which is already covered by specific legislation governing consumer credit (including the Consumer Credit Directive).
18 Under the Commission proposal, the ECSP label would be explicitly ‘opt-in’: platforms could apply voluntarily for the label, but only if they did not already hold authorisation to provide crowdfunding services under national law (although such a domestic licence would not afford a ‘passport’ to operate in other Member States).
19 The proposal is part of the wider Capital Markets Union (CMU) initiative, which aims to increase end fragmentation of the EU’s capital markets along largely national lines.
20 See article 1(3) of (the Prospectus Regulation). Similarly, the ECSP label would not be available to firms which provide wider investment services under the Markets in Financial Instruments Directive (MiFID II) which covers many more investment services than only linking investors and projects through crowdfunding. A would amend MiFID II to disapply that Directive to crowdfunding platforms authorised under the new Crowdfunding Regulation.
21 See footnote 16 for more information on loan- and investment-based crowdfunding.
22 As the Committee noted in its first Report on the proposal, although the Commission noted in its Impact Assessment that the withdrawal of the UK—as the EU’s largest hub for crowdfunding—“raises questions about the need for a (…) framework to assess the equivalence of a third country regime”, the draft legislation itself contains no provisions on equivalence mechanism to extend the passport to non-EU crowdfunding platforms.
23 The Parliament’s Rapporteur on the proposal was Ashley Fox, a British Conservative Party MEP.
24 Rule 240 of the European Parliament’s Rules of Procedure provides that “all Parliament’s unfinished business shall be deemed to have lapsed” at the last session before EU elections, except where “the Conference of Presidents shall take a decision on reasoned requests from parliamentary committees and other institutions to resume or continue the consideration of such unfinished business” at the beginning of the new parliamentary term. At the start of the 2014–2019 parliamentary term, that decision was taken in September 2014. It was communicated to the Commission and Council .
25 While article 1(3) of the Prospectus Regulation in principle applies the requirement to issue a prospectus for offers of €1 million or more, article 3(2)(b) allows individual Member States to exempt offers of less than €8 million.
26 The Council and Parliament could change the type of instrument for the Commission proposal from Regulation to Directive by mutual agreement. This has previously happened, for example, during the negotiations on the (Directive 2013/30/EU).
27 In his letter, the Minister apologises for the delay in writing to the Committee, saying: “There have been several changes in the direction of travel for this file since I wrote to you in December, and it seemed prudent to wait until there was clarity on progress before updating the Committee”.
28 Regulations apply automatically and uniformly to all EU countries as soon as they enter into force, without needing to be transposed into national law. Directives require EU countries adopt measures to ‘transpose’ them into national law, but leave them free to choose how to do so.
29 As originally proposed by the Commission, peer-to-peer lending to consumers would not be covered since this is regulated separately under the Consumer Credit Directive and national law. In addition, the Council’s reworked version of the Crowdfunding Regulation would include ‘pricing’ and ‘conduit’ models (which the Minister explains is respectively where the platform either sets the price of the investment, or simply advertises the investment opportunity), while ‘discretionary’ platforms (where a platform manages a portfolio of loans on behalf of an investor in order to meet a target rate of return) would be out of scope, and regulated solely by national law. Its potential inclusion would be reviewed by the European Commission two years after the Regulation takes effect.
30 The version of the Regulation put forward by the Council would define ‘sophisticated investors’ as those who are professional investors under MiFID II (e.g. financial firms, large non-financial companies, and “national and regional authorities”) and other legal or natural persons which meet certain financial criteria, if they accept being treated as a ‘sophisticated’ investor.
31 The Minister says that, if it had to apply the Regulation, the UK would place a limit ensuring that non-sophisticated investors invest no more than 10% of their net wealth in an individual project.
32 The draft Withdrawal Agreement would not give the Government the option of opting out of new EU legislation in the field of financial services during the transitional period, so during that time it would need to apply the Crowdfunding Regulation irrespective of its substance.
33 In his letter, the Minister notes that “the UK accounts for 75% of the European crowdfunding industry”.
Published: 9 September 2019