Monday, February 2, 2015
It was recently announced that an initiative, entitled “Vision and Targets for IFS 2020” will target the creation of 10,000 additional jobs over the next five years. The initiative has been drawn up for the Government and is set to be considered by the Cabinet later this month. Crowdfunding is due to feature in the plan. It will be interesting to see what comes out in the plan and what reaction if any there is to the recent publication from ESMA (the European Securities and Markets Authority) on the issue of crowdfunding in the EU.
On 18 December 2014, ESMA published two important documents (an Opinion and an Advice note) for the benefit of the crowdfunding industry, and specifically investment-based crowdfunding. The documents attempt to highlight issues for consideration by the EU institutions to achieve greater regulatory and supervisory convergence within the EU.
The Opinion is addressed to Member States and the Advice note is addressed to the EU institutions – Commission, Parliament and Council.
By way of background, ESMA is charged with helping to build a common supervisory culture, practices, procedures and approaches through the EU. In tandem with the European Banking Authority, it jointly prepared a paper on crowdfunding as an input to the European Commission’s consultation paper on the industry in October 2013. ESMA hopes that this document will assist Member States in discussing the subject with platforms and interested parties, in a bid to advance the industry.
Highlights from the Opinion include:
The Advice Note identifies some risk issues for consideration by regulators which have been well documented to date, including high risk of some or all of investor capital, risk of dilution, lack of liquidity, and conflicts of interest for crowdfunding platforms.
ESMA identifies key components of an appropriate regulatory regime including proportionate capital requirements, ensuring investors understand the risks, segregation of assets in case of insolvency of a platform, and conduct of business rules. ESMA believes there is a misconception in the market on what regulatory compliance would entail, and is concerned that business models are being developed deliberately to try to avoid the regulatory requirements. ESMA advises the EU institutions to consider whether there is a case for action at EU level to reduce the incentive for crowdfunding businesses to structure their business model to avoid regulation. It goes to say that compliance with MiFID would provide a reasonable level of risk mitigation, but short of that, ESMA believes there is a gap in terms of investor protection. While the gap may possible be addressed at national level, it would not apply for cross border activities.
I would agree with the premise that in order to scale a crowdfunding platform, Irish operators will need to think of the opportunities that exist outside of this country – and to do this with confidence, regulatory compliance needs to be tackled. While there is nothing startling new in the two documents, I would view it as positive that the debate is being advanced on the industry and how to make it work cross-border. As you might expect, what it lacks is concrete next steps in order to bring that about. What it does suggest however, is that a toolkit already exists (via the existing legislation) and that if changes are required to specifically suit crowdfunding, why re-invent the wheel? We wait to see if the Commission will provide comment and we may yet hear from the European Banking Authority on the issue this year. I wonder how much attention has been paid to these documents at Government level and whether Central Bank or the Government will comment on them. Maybe we will get some feedback via today’s ‘Vision and Targets for IFS 2020’.