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20 December 2013

EBA response
to the European Commission’s
Consultation Paper on Crowdfunding
The European Banking Authority (EBA) welcomes the consultation and would like to contribute to the growth
of crowdfunding by ensuring that all parties involved in crowdfunding can have confidence when interacting
with this particular type of financial activity.
The Commission’s Consultation Paper identifies a number of different crowdfunding models (donations,
rewards, pre-selling, profit sharing, lending, and securities). The extent to which the operation of any of these
models, combined or not with some other ancillary functions, might fall within the scope of existing EU
Directives and Regulations, such as the Payment Services Directive, is, at this early stage of the analytical
process, unclear. The legal nature of the platforms that bring together those in need of funding and those that
are willing to fund is similarly uncertain.
However, the EBA has carried out a risk analysis of the model that would fall most clearly into its remit – the
lending model – because that model can be seen to be an alternative to credit sought from, and provided by,
credit institutions. The EBA’s response document therefore focuses on the lending model only and is a
response primarily to the section headed “Risks of Crowdfunding” in the Consultation Paper.
The EBA acknowledges that potential benefits may arise from the existence of crowdfunding as an option for
gathering funds and for supporting ideas or projects, bringing more competition and innovation, and providing
for lending options outside the traditional banking sector.
However, the EBA has identified several risks that arise to the various market participants involved, including
fund contributors/lenders and fund seekers/borrowers, which suggests that some (yet to be defined) risk
mitigation may be required to ensure that market participants have confidence in this new market. Some of
the risks are applicable to the provision of credit more generally, while others are specific to crowdfunding.
They are presented jointly for ease of readability.
At this early stage, the response does deliberately not yet identify which, if indeed any, response (regulatory or
otherwise) is best suited to mitigate these risks. The EBA seeks to carry out this work jointly with ESMA, who is
interested in several of the other business models.

Risks arising for lenders/fund contributors
Financial / Credit risk
1)

While many mainstream investments are currently offering poor returns and volatility, consumers may
be enticed by promises of high returns apparently available through CF while not possessing the degree
of financial literacy required to evaluate the risks involved;

2)

Not all platforms provide the same level of due diligence. Investors might believe that the fact a
business is listed on a platform may indicate that a certain amount of due diligence has been performed;

3)

Lenders cannot be certain about borrowers’ creditworthiness, as borrowers do not tend to be proceed
through a creditworthiness /credit rating assessment;

4)

Borrowers may not pay back the lender, as a result of fraud or, as is common for many other forms of
business start-ups, business failure;

Risk of operator default
5)

Platform failure may lead to detriment for lenders because without a portal co-ordinating loans and
repayments, the borrowers may not have adequate records setting out their payment commitments;

6)

The lack of registration and authorisations means that the lender does not have information regarding
the platform’s reputation and probity. There is no EU harmonised prior registration/authorization
requirement for platforms, regarding the operation of the lending model;

7)

Lender may not be informed of the risks, as platform operator may be subject to conflicts of interest and
might therefore downplay the risks involved;

Legal risk
8)

Lenders may have to turn to courts, as it can be difficult to identify responsibilities addressed to the
platform or to borrowers;

9)

Lender doesn’t have guarantees that contract terms will be followed, particularly with regard to
excessive fees, repayments, interest or additional funds that may be required;

10)

Lender does not have clear information or has received misleading information regarding fees, interest
rates, and product features;

11)

Lender experiences unsatisfactory complaints handling.

12)

Lender does not have enough information or receives misleading information regarding project value
and the project owner’s reputation;

13)

Lender does not have the assurance that the funds will reach the borrower, as platforms are not
required to follow money remittance provider authorisation - relevant when funds are transmitted via a
platform;

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Risks arising for borrowers/fund seekers
14)

Borrowers’ intellectual property rights could potentially be violated as borrowers have to disclose their
ideas in order to promote the business;

Financial / Credit risk
15)

Borrower does not have enough information regarding capacity of fund contributors to deliver the
funds.

16)

Borrower does not receive the contracted funds;

17)

Borrower does not have any assurance that his project's risk evaluation has been carried out according
to any specific standard;

Risk of operator default
18)

Platform failure may lead to detriment for borrowers. Without the platform to co-ordinate repayments,
the borrower may not have adequate records setting out his payment commitments, which may result
in legal action of the lender against the borrower;

Liquidity risk
19)

Borrower can face liquidity problems if, after the project’s financial approval, the provision of funds is
delayed, thus undermining the success of the project;

Legal risk
20)

Borrower cannot be certain that he will receive any funds at all, as the platforms are not subject to
money remittance service requirements, which are relevant when funds are transmitted via platforms;

21)

Borrower does not have information regarding the platform’s reputation, security and supervision;

22)

Borrower cannot be assured that contract terms will be followed and may therefore not receive the
promised funds; may require to pay excessive fees; may be required to provide additional guarantees;
or may be required to make additional repayments;

23)

Borrower does not have clear information regarding fees;

24)

Borrower is bound to a contract with unfair termination clauses;

25)

Borrower experiences unsatisfactory complaints handling;

Miscellaneous, general risks
26)

It may be difficult to ensure that the crowdfunding market maintains adequate standards because, as an
internet-facilitated activity, firms may be based anywhere in the world and may choose jurisdictions that
impose the lightest regulation;

27)

CF platforms might be used for fraud and money laundering, particularly where the firms running the
platforms do not undertake sufficient due diligence;

28)

It is not certain that the ‘crowd’ is any better than an individual at spotting sound investment
opportunities. Instead, investors may act with a herd mentality and, seeing that other people have

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invested, take possibly false comfort that adequate due diligence has been performed and the
investment is good value for money;

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