The European Banking Authority (EBA) has published its Final Report on draft Regulatory Technical Standards (RTS) specifying the information that crowdfunding service providers offering individual portfolio management of loans shall provide to investors in relation to the method to assess credit risk, and on each individual portfolio. The standards coincided with more regulatory clarifications distributed by the European Securities and Markets Authority (ESMA) distributing its final report on the “Draft Technical Standards under the European Crowdfunding Service Providers for Business Regulation.”
On November 10, 2021, the European Crowdfunding Service Providers Rules went into effect for the European Union harmonizing online capital formation rules.
According to the EBA, the draft RTS also specifies the policies, procedures, and organizational arrangements that crowdfunding service providers shall have in place in relation to any contingency fund they may offer to investors. These RTS are the first of two mandates assigned to EBA with a view to contributing to a sound prudential and disclosure framework for crowdfunding service providers.
The EBA explains that when investing in a portfolio of loans offered by crowdfunding service providers, investors may face potential information asymmetries. In order to address this issue, investors should have access to all relevant information about the composition of their portfolio, including the projects where their funds are invested, as well as the quality of the loans financing such projects.
The EBA states that investors are exposed not only to risks connected to the loans in which their funds are invested but also to the way the crowdfunding service provider assesses the risk of these loans and projects and how it manages the selection of loans for the portfolio.
The draft RTS requires crowdfunding service providers to show that the measurement techniques used for credit risk assessments are based on a sufficient number of elements and are appropriate to the complexity and level of the risk for the individual project; the portfolio; the project owner. In addition, the draft RTS set out the information that crowdfunding platforms must disclose, namely the key characteristics of each individual portfolio.
The EBA adds that crowdfunding service providers may offer a dedicated contingency fund to compensate investors for the losses they may incur, in case project owners do not reimburse their loans, the draft RTS outlines adequate policies, procedures, and governance arrangements that providers should have in place when managing, either directly or through a third-party provider, contingency funds.