EBA launched a consultation on the regulatory technical standards specifying the information that must be provided to keep investors appropriately informed about their risk exposure with respect to the individual portfolio management of loans. Article 6(7) of the European Crowdfunding Service Providers Regulation (ECSPR or Regulation 2020/1503) mandates EBA to lay out the draft regulatory technical standards for this purpose. The comment period for this consultation ends on September 04, 2021. Post which, EBA is expected to submit the final regulatory standards to EC in October 2021.
The proposed regulatory technical standards specify 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; the draft standards require 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 risks underlying the single project, the portfolio, and the project owners
- Adequate policies, procedures, and governance arrangements that providers should have in place when managing, either directly or through a third party provider, contingency funds; this is because 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
- Information disclosures required with respect to several key characteristics of each loan included in a certain portfolio
Crowdfunding risks may arise if investors underestimate the risks of their investment, assuming that every loan and project within a portfolio is subject to an adequate risk assessment process. Additionally, as crowdfunding is particularly relevant for small businesses and startups, often with little or no credit history, investors relying on these platforms may not be fully aware of the real quality of borrowers and may find it difficult to appreciate the risks involved for each of the loans in the portfolio. To avoid any misrepresentation of the underlying risk, the ECSPR makes it clear that the mere existence of these funds does not provide a guaranteed rate of return of the investment and that there is absolute discretion on potential refunds.
Comment Due Date: September 04, 2021
Keywords: Europe, EU, Banking, Credit Risk, Portfolio Management, Crowdfunding, Crowdfunding Service Providers, ECSPR, Regulation 2020/1503, Disclosures, EBA
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