ECSPR - Ongoing requirements and conduct obligations for crowdfunding services
Written By
Dr. Michael Jünemann
Partner
Germany
As co-head of the global Finance & Financial Regulation Practice Groups and head of the German Finance & Financial Regulation Practice Group, I advise on national and international finance and capital markets law as well as on commercial and corporate law. I am also a member of the international steering group of our Financial Services Sector Group.
Johannes Wirtz, LL.M. (London)
Partner
Germany
As partner in our Finance & Financial Regulation Group in Frankfurt, I advise our national and international clients on banking regulatory issues and finance law.
Timo Förster
Associate
Germany
As an associate in our Finance & Financial Regulation Practice Group located in Frankfurt, I advise international and national clients on regulatory issues and finance law.
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On 10 November 2021, the Crowdfunding Regulation ((EU) 2020/1503 - European Crowdfunding Service Provider Regulation - "ECSPR") will enter into force.
In a first post, we reported on the scope of application of the ECSPR and the permission requirement for crowdfunding service providers. In this second post, we will look at the ongoing requirements on crowdfunding service providers and their duties of conduct.
1. Duties to act
The ECSPR imposes general requirements on crowdfunding service providers that are already known in a similar way from the German Securities Trading Act (WpHG) and MiFID II. Crowdfunding service providers must act "honestly, fairly and professionally" and in the best interests of their clients. Crowdfunding service providers should offer investors the crowdfunding offers in a neutral manner. Therefore, they must not pay or accept any remuneration, discount or non-monetary benefit for routing investor’s orders to a particular crowdfunding offer.
In the context of brokerage, ECSPR basically wants the investor to make the investment decision in each case. When managing loan portfolios, the respective parameters set by the investor must be followed and the best result needs to be achieved for the investor. The decision-making process must then be disclosed to the investor. In this case, the investor does not have to make every investment decision himself.
Special purpose vehicles (SPVs) may only be used in certain cases. In this regard, the European Securities and Markets Authority (ESMA) has already published a document with questions and answers (Q&As).
2. Management
The ECSPR requires effective and prudent management. This includes segregation of duties, business continuity in the event of a crisis and prevention of conflicts of interest.
The Management shall establish systems and controls to assess the risks of the loans intermediated. The crowdfunding service provider shall take this assessment into account when setting the price for the crowdfunding offer.
3. Due diligence on project owners
Before a crowdfunding service provider publishes an offering, the project owner(such as the borrower or issuer of the securities) needs to be reviewed carefully. This includes that the crowdfunding service provider checks whether the project owner has certain criminal records. It must also check that the project owner is not located in a high-risk country for money laundering or in a country classified as non-cooperative.
4. Complaints
The ECSPR also sets out certain requirements on how complaints from clients are to be handled. ESMA has already consulted on regulatory technical standards on rules, standard formats and procedures for complaint handling to be submitted to the European Commission by 10 November 2021.
Customer complaints must be free of charge. They must be dealt with promptly, fairly and consistently. A description of these procedures must be published.
5. Conflicts of interest
The ECSPR aims to prevent conflicts of interest. Therefore, crowdfunding service providers must adopt corresponding internal regulations and disclose the nature and cause of conflicts of interest on their website. This principle is also known from the German Securities Trading Act (WpHG) and MiFID II.
In order to avoid conflicts of interest, the ECSPR also prohibits a crowdfunding service provider from holding interests in crowdfunding offers brokered on its platform. Project Owners holding 20% or more of the capital shares or voting rights of the crowdfunding service provider may not be intermediated. Likewise, members of the management or employees of the crowdfunding service provider as well as persons associated with the shareholders, members of the management or employees may not act as project owners. It must be disclosed, if these persons are admitted as investors on the platform. The investment of these persons must be made on the same terms as those offered to other investors.
To this end, ESMA has already consulted on regulatory technical standards on the detailed requirements to be submitted to the European Commission by 10 November 2021.
6. Capital requirements
The capital requirements are simplified compared to credit institutions and financial services institutions/investment firms. Thus, a minimum capital of one quarter of the previous year's annually reviewed fixed overheads, but at least EUR 25 000, is required. The fixed overheads also include the costs of servicing loans if the crowdfunding service provider also arranges the granting of loans. The capital must be available either in the form of own funds (Common Equity Tier 1 items according to CRR), in the form of insurance or comparable guarantee or a combination of both. Special rules exist for credit institutions, financial services institutions/investment firms, payment institutions and e-money institutions.
7. Do you have any questions regarding a license as crowdfunding service provider?
Our financial regulation experts combine pragmatism and an interest in innovative solutions with technical know-how. In our daily dealings with German and European regulators, we navigate our clients safely through all registration and licensing procedures and are always up-to-date on new procedures and regulatory practice. We will be happy to advise you on this.
1. Duties to act
The ECSPR imposes general requirements on crowdfunding service providers that are already known in a similar way from the German Securities Trading Act (WpHG) and MiFID II. Crowdfunding service providers must act "honestly, fairly and professionally" and in the best interests of their clients. Crowdfunding service providers should offer investors the crowdfunding offers in a neutral manner. Therefore, they must not pay or accept any remuneration, discount or non-monetary benefit for routing investor’s orders to a particular crowdfunding offer.
In the context of brokerage, ECSPR basically wants the investor to make the investment decision in each case. When managing loan portfolios, the respective parameters set by the investor must be followed and the best result needs to be achieved for the investor. The decision-making process must then be disclosed to the investor. In this case, the investor does not have to make every investment decision himself.
Special purpose vehicles (SPVs) may only be used in certain cases. In this regard, the European Securities and Markets Authority (ESMA) has already published a document with questions and answers (Q&As).
2. Management
The ECSPR requires effective and prudent management. This includes segregation of duties, business continuity in the event of a crisis and prevention of conflicts of interest.
The Management shall establish systems and controls to assess the risks of the loans intermediated. The crowdfunding service provider shall take this assessment into account when setting the price for the crowdfunding offer.
3. Due diligence on project owners
Before a crowdfunding service provider publishes an offering, the project owner(such as the borrower or issuer of the securities) needs to be reviewed carefully. This includes that the crowdfunding service provider checks whether the project owner has certain criminal records. It must also check that the project owner is not located in a high-risk country for money laundering or in a country classified as non-cooperative.
4. Complaints
The ECSPR also sets out certain requirements on how complaints from clients are to be handled. ESMA has already consulted on regulatory technical standards on rules, standard formats and procedures for complaint handling to be submitted to the European Commission by 10 November 2021.
Customer complaints must be free of charge. They must be dealt with promptly, fairly and consistently. A description of these procedures must be published.
5. Conflicts of interest
The ECSPR aims to prevent conflicts of interest. Therefore, crowdfunding service providers must adopt corresponding internal regulations and disclose the nature and cause of conflicts of interest on their website. This principle is also known from the German Securities Trading Act (WpHG) and MiFID II.
In order to avoid conflicts of interest, the ECSPR also prohibits a crowdfunding service provider from holding interests in crowdfunding offers brokered on its platform. Project Owners holding 20% or more of the capital shares or voting rights of the crowdfunding service provider may not be intermediated. Likewise, members of the management or employees of the crowdfunding service provider as well as persons associated with the shareholders, members of the management or employees may not act as project owners. It must be disclosed, if these persons are admitted as investors on the platform. The investment of these persons must be made on the same terms as those offered to other investors.
To this end, ESMA has already consulted on regulatory technical standards on the detailed requirements to be submitted to the European Commission by 10 November 2021.
6. Capital requirements
The capital requirements are simplified compared to credit institutions and financial services institutions/investment firms. Thus, a minimum capital of one quarter of the previous year's annually reviewed fixed overheads, but at least EUR 25 000, is required. The fixed overheads also include the costs of servicing loans if the crowdfunding service provider also arranges the granting of loans. The capital must be available either in the form of own funds (Common Equity Tier 1 items according to CRR), in the form of insurance or comparable guarantee or a combination of both. Special rules exist for credit institutions, financial services institutions/investment firms, payment institutions and e-money institutions.
7. Do you have any questions regarding a license as crowdfunding service provider?
Our financial regulation experts combine pragmatism and an interest in innovative solutions with technical know-how. In our daily dealings with German and European regulators, we navigate our clients safely through all registration and licensing procedures and are always up-to-date on new procedures and regulatory practice. We will be happy to advise you on this.
