Regulation (EU) 2020/1503 of the European Parliament and of the CouncilShow full title

CHAPTER II U.K. Provision of crowdfunding services and organisational and operational requirements of crowdfunding service providers

Article 3 U.K. Provision of crowdfunding services

1. Crowdfunding services shall only be provided by legal persons that are established in the Union and that have been authorised as crowdfunding service providers in accordance with Article 12.

2. Crowdfunding service providers shall act honestly, fairly and professionally in accordance with the best interests of their clients.

3. Crowdfunding service providers shall not pay or accept any remuneration, discount or non-monetary benefit for routing investors’ orders to a particular crowdfunding offer made on their crowdfunding platform or to a particular crowdfunding offer made on a third-party crowdfunding platform.

4. Crowdfunding service providers may propose to individual investors specific crowdfunding projects that correspond to one or more specific parameters or risk indicators chosen by the investor. Where the investor wishes to make an investment in the suggested crowdfunding projects, the investor shall review and expressly take an investment decision in relation to each individual crowdfunding offer.

Crowdfunding service providers that provide individual portfolio management of loans shall do so in adherence to the parameters provided by the investors and shall take all necessary steps to obtain the best possible result for those investors. Crowdfunding service providers shall disclose to investors the decision-making process for executing the received discretionary mandate.

5. By way of derogation from the first subparagraph of paragraph 4, crowdfunding service providers providing individual portfolio management of loans may exercise discretion on behalf of their investors within the agreed parameters without requiring investors to review and take an investment decision in relation to each individual crowdfunding offer.

6. Where a special purpose vehicle is used for the provision of crowdfunding services, only one illiquid or indivisible asset shall be offered through such a special purpose vehicle. That requirement shall apply on a look-through basis to the underlying illiquid or indivisible asset held by financial or legal structures fully or partially owned or controlled by the special purpose vehicle. The decision to take exposure to that underlying asset shall exclusively lie with investors.

Article 4 U.K. Effective and prudent management

1. The management body of a crowdfunding service provider shall establish, and oversee the implementation of, adequate policies and procedures to ensure effective and prudent management, including the segregation of duties, business continuity and the prevention of conflicts of interest, in a manner that promotes the integrity of the market and the interests of its clients.

2. The management body of a crowdfunding service provider shall establish, and oversee the implementation of, appropriate systems and controls to assess the risks related to the loans intermediated on the crowdfunding platform.

A crowdfunding service provider that provides individual portfolio management of loans shall ensure that it has in place adequate systems and controls for the management of risk and financial modelling for that provision of services and that it complies with the requirements set out in Article 6(1) to (3).

3. The management body of a crowdfunding service provider shall review, at least once every two years, taking into account the nature, scale and complexity of the crowdfunding services provided, the prudential safeguards referred to in point (h) of Article 12(2) and the business continuity plan referred to in point (j) of Article 12(2).

4. Where a crowdfunding service provider determines the price of a crowdfunding offer, it shall:

(a) undertake a reasonable assessment of the credit risk of the crowdfunding project or project owner before the crowdfunding offer is made, including by considering the risk that the project owner will not make, in the case of a loan, bond or other form of securitised debt, one or more repayments by the due date;

(b) base the credit risk assessment referred to in point (a) on sufficient information, including the following:

(i)

where available, audited accounts covering the two latest financial years;

(ii)

information of which it is aware at the time the credit risk assessment is carried out;

(iii)

information which has been obtained, where appropriate, from the project owner; and

(iv)

information which enables the crowdfunding service provider to carry out a reasonable credit risk assessment;

(c) establish, implement and maintain clear and effective policies and procedures to enable it to carry out credit risk assessments, and publish those policies and procedures;

(d) ensure that the price is fair and appropriate, including in situations where a crowdfunding service provider that determines the price of loans is facilitating an exit for a lender before the maturity date of a loan;

(e) conduct a valuation of each loan in at least the following circumstances:

(i)

at the moment when the loan is originated;

(ii)

where the crowdfunding service provider considers that the project owner is unlikely to fulfil its obligations to repay the loan in full, without the crowdfunding service provider enforcing any relevant security interest or taking other steps with analogous effect;

(iii)

following a default; and

(iv)

where the crowdfunding service provider is facilitating an exit for a lender before the maturity date of the loan;

(f) have and use a risk-management framework that is designed to achieve compliance with the requirements set out in points (a) to (e) of this paragraph;

(g) maintain a record of each facilitated crowdfunding offer sufficient to demonstrate that:

(i)

a credit risk assessment was carried out when required and in compliance with points (a) and (b) of this paragraph; and

(ii)

the price of the crowdfunding offer was fair and appropriate in line with the risk-management framework.

Article 5 U.K. Due diligence requirements

1. A crowdfunding service provider shall undertake at least a minimum level of due diligence in respect of project owners that propose their projects to be funded through the crowdfunding platform of the crowdfunding service provider.

2. The minimum level of due diligence referred to in paragraph 1 shall include obtaining all of the following evidence:

(a) that the project owner has no criminal record in respect of infringements of national rules in fields of commercial law, insolvency law, financial services law, anti-money laundering law, fraud law or professional liability obligations;

(b) that the project owner is not established in a non-cooperative jurisdiction, as recognised by the relevant Union policy, or in a high-risk third country pursuant to Article 9(2) of Directive (EU) 2015/849.

Article 6 U.K. Individual portfolio management of loans

1. Where a crowdfunding service provider offers individual portfolio management of loans, an investor shall give the mandate specifying the parameters for providing the service, which shall include at least two of the following criteria that every loan in the portfolio will have to comply with:

(a) the minimum and maximum interest rate payable under any loan facilitated for the investor;

(b) the minimum and maximum maturity date of any loan facilitated for the investor;

(c) the range and distribution of any risk categories applicable to the loans; and

(d) if an annual target rate of return on investment is offered, the likelihood that the selected loans will enable the investor to achieve the target rate with reasonable certainty.

2. In order to comply with paragraph 1, a crowdfunding service provider shall have in place robust internal processes and methodologies and use appropriate data. The crowdfunding service provider may use its own data or data sourced from third parties.

On the basis of sound and well-defined criteria, and taking into account all the relevant factors that may have unfavourable effects on the performance of the loans, the crowdfunding service provider shall assess:

(a) the credit risk of individual crowdfunding projects selected for the investor’s portfolio;

(b) the credit risk at the investor’s portfolio level; and

(c) the credit risk of the project owners selected for the investor’s portfolio by verifying the prospect of the project owners meeting their obligations under the loan.

The crowdfunding service provider shall also provide a description of the method used for the assessments referred to in points (a), (b) and (c) of the second subparagraph to the investor.

3. Where a crowdfunding service provider offers individual portfolio management of loans, it shall keep records of the mandate given and of every loan in an individual portfolio. The crowdfunding service provider shall keep records of the mandate and of every loan for at least three years after its maturity date on a durable medium.

4. A crowdfunding service provider shall, on a continuous basis and upon the request of an investor, provide via electronic means at least the following information on each individual portfolio:

(a) the list of individual loans of which a portfolio is composed;

(b) the weighted average annual interest rate on loans in a portfolio;

(c) the distribution of loans according to risk category, in percentage and absolute numbers;

(d) for every loan of which a portfolio is composed, key information, including at least an interest rate or other compensation to the investor, maturity date, risk category, schedule for the repayment of the principal and payment of interest, compliance of the project owner with that instalment payment schedule;

(e) for every loan of which a portfolio is composed, risk mitigation measures including collateral providers or guarantors or other types of guarantees;

(f) any default on credit agreements by the project owner within the past five years;

(g) any fees paid in respect of the loan by the investor, the crowdfunding service provider or the project owner;

(h) if the crowdfunding service provider has carried out a valuation of the loan:

(i)

the most recent valuation;

(ii)

the valuation date;

(iii)

an explanation as to why the crowdfunding service provider conducted the valuation; and

(iv)

a fair description of the likely actual return, taking into account fees and default rates.

5. Where a crowdfunding service provider has established and operates a contingency fund for its activity related to the individual portfolio management of loans, it shall provide the following information to the investors:

(a) a risk warning specifying: ‘The contingency fund we offer does not give you a right to a payment so it may happen that you do not receive a pay-out even if you suffer loss. The contingency fund operator has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the contingency fund when considering whether or how much to invest.’;

(b) a description of the policy of the contingency fund, including:

(i)

an explanation of the source of the money paid into the fund;

(ii)

an explanation of how the fund is governed;

(iii)

an explanation concerning whom the money belongs to;

(iv)

the considerations the contingency fund operator takes into account when deciding whether or how to exercise its discretion to pay out from the fund, including:

• whether or not the fund has sufficient money to pay; and

• that the contingency fund operator has absolute discretion in any event not to pay or to decide the amount of the payment;

(v)

an explanation of the process for considering whether to make a discretionary payment from the fund; and

(vi)

a description of how the money paid into the fund will be treated in the event of insolvency of the contingency fund operator.

6. A crowdfunding service provider that has established and operates a contingency fund as referred to in paragraph 5 shall provide the following information about the performance of the fund to the public on a quarterly basis:

(a) the size of the contingency fund compared to the total amounts outstanding on loans relevant to the contingency fund; and

(b) the ratio between payments made out of the contingency fund to the total amounts outstanding on loans relevant to the contingency fund.

7. EBA shall, in close cooperation with ESMA, develop draft regulatory technical standards to specify:

(a) the elements, including the format, that are to be included in the description of the method referred to in the third subparagraph of paragraph 2;

(b) the information referred to in paragraph 4; and

(c) the policies, procedures and organisational arrangements that crowdfunding service providers are to have in place as regards any contingency funds they might offer as referred to in paragraphs 5 and 6.

EBA shall submit those draft regulatory technical standards to the Commission by 10 November 2021.

Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 7 U.K. Complaints handling

1. Crowdfunding service providers shall have in place effective and transparent procedures for the prompt, fair and consistent handling of complaints received from clients and shall publish descriptions of those procedures.

2. Crowdfunding service providers shall ensure that clients are able to file complaints against them free of charge.

3. Crowdfunding service providers shall develop and make available to clients a standard template for complaints and shall keep a record of all complaints received and the measures taken.

4. Crowdfunding service providers shall investigate all complaints in a timely and fair manner, and communicate the outcome within a reasonable period of time to the complainant.

5. ESMA shall develop draft regulatory technical standards to specify the requirements, standard formats and procedures for complaint handling.

ESMA shall submit those draft regulatory technical standards to the Commission by 10 November 2021.

Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

Article 8 U.K. Conflicts of interest

1. Crowdfunding service providers shall not have any participation in any crowdfunding offer on their crowdfunding platforms.

2. Crowdfunding service providers shall not accept as project owners in relation to the crowdfunding services offered on their crowdfunding platform any of the following:

(a) their shareholders holding 20 %, or more, of share capital or voting rights;

(b) their managers or employees;

(c) any natural or legal person linked to those shareholders, managers or employees by control as defined in point (35)(b) of Article 4(1) of Directive 2014/65/EU.

Crowdfunding service providers that accept as investors in the crowdfunding projects offered on their crowdfunding platform any of the persons referred to in points (a), (b) and (c) of the first subparagraph shall fully disclose on their website the fact that they accept such persons as investors, including information on the specific crowdfunding projects invested in, and shall ensure that such investments are made under the same conditions as those of other investors and that those persons do not enjoy any preferential treatment or privileged access to information.

3. Crowdfunding service providers shall maintain and operate effective internal rules to prevent conflicts of interest.

4. Crowdfunding service providers shall take all appropriate steps to prevent, identify, manage and disclose conflicts of interest between the crowdfunding service providers themselves, their shareholders, their managers or employees, or any natural or legal person linked to them by control, as defined in point (35)(b) of Article 4(1) of Directive 2014/65/EU, and their clients, or between one client and another client.

5. Crowdfunding service providers shall disclose to their clients the general nature and sources of conflicts of interest and the steps taken to mitigate them.

Such disclosure shall be made on the website of the crowdfunding service provider in a prominent place.

6. The disclosure referred to in paragraph 5 shall:

(a) be made on a durable medium;

(b) include sufficient detail, taking into account the nature of each client, to enable each client to take an informed decision about the service in the context of which the conflict of interest arises.

7. ESMA shall develop draft regulatory technical standards to specify:

(a) the requirements for the maintenance or operation of internal rules referred to in paragraph 3;

(b) the steps referred to in paragraph 4;

(c) the arrangements for the disclosure referred to in paragraphs 5 and 6.

When developing those draft regulatory technical standards, ESMA shall take into account the nature, scale and complexity of the crowdfunding services provided by the crowdfunding service provider.

ESMA shall submit those draft regulatory technical standards to the Commission by 10 November 2021.

Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

Article 9 U.K. Outsourcing

1. Crowdfunding service providers shall, when relying on a third party for the performance of operational functions, take all reasonable steps to avoid additional operational risk.

2. Outsourcing of operational functions referred to in paragraph 1 shall not impair the quality of the crowdfunding service providers’ internal control and the ability of the competent authority to monitor the crowdfunding service providers’ compliance with this Regulation.

3. Crowdfunding service providers shall remain fully responsible for compliance with this Regulation with respect to the outsourced activities.

Article 10 U.K. Provision of asset safekeeping services and payment services

1. Where asset safekeeping services and payment services are provided, crowdfunding service providers shall inform their clients of all of the following:

(a) the nature and terms and conditions of those services, including references to the applicable national law;

(b) whether those services are provided by them directly or by a third party.

2. Where crowdfunding service providers carry out payment transactions related to transferable securities and admitted instruments for crowdfunding purposes, they shall deposit the funds with one of the following entities:

(a) a central bank; or

(b) a credit institution authorised in accordance with Directive 2013/36/EU.

3. Transferable securities or admitted instruments for crowdfunding purposes offered on a crowdfunding platform, and which can be registered in a financial instruments account opened in the name of an investor or which can be physically delivered to a custodian, shall be held in custody by the crowdfunding service provider or by a third party. An entity providing custody services shall hold an authorisation in accordance with Directive 2013/36/EU or 2014/65/EU.

4. A crowdfunding service provider may itself, or through a third party, provide payment services provided that the crowdfunding service provider itself, or the third party, is a payment service provider in accordance with Directive (EU) 2015/2366.

5. Where a crowdfunding service provider does not provide payment services in relation to the crowdfunding services, either itself or through a third party, such a crowdfunding service provider shall put in place and maintain arrangements to ensure that project owners accept funding of crowdfunding projects, or any other payment, only by means of a payment service provider in accordance with Directive (EU) 2015/2366.

Article 11 U.K. Prudential requirements

1. Crowdfunding service providers shall, at all times, have in place prudential safeguards equal to an amount of at least the higher of the following:

(a) EUR 25 000; and

(b) one quarter of the fixed overheads of the preceding year, reviewed annually, which are to include the cost of servicing loans for three months where the crowdfunding service provider also facilitates the granting of loans.

2. The prudential safeguards referred to in paragraph 1 of this Article shall take one of the following forms:

(a) own funds, consisting of Common Equity Tier 1 items referred to in Articles 26 to 30 of Regulation (EU) No 575/2013 of the European Parliament and of the Council(1) after the deductions in full, pursuant to Article 36 of that Regulation, without the application of threshold exemptions pursuant to Articles 46 and 48 of that Regulation;

(b) an insurance policy covering the territories of the Union where crowdfunding offers are actively marketed or a comparable guarantee; or

(c) a combination of points (a) and (b).

3. Paragraph 1 of this Article does not apply to crowdfunding service providers that are undertakings subject, on an individual basis or on the basis of their consolidated situation, to Title III of Part Three of Regulation (EU) No 575/2013 or to Regulation (EU) 2019/2033 of the European Parliament and of the Council(2).

4. Paragraph 1 of this Article does not apply to crowdfunding service providers that are undertakings subject to Articles 4 and 5 of Directive 2009/110/EC or Articles 7 to 9 of Directive (EU) 2015/2366.

5. Where a crowdfunding service provider has been in operation for less than 12 months, it may use forward-looking business estimates in calculating the fixed overheads, provided that it starts using historical data as soon as it becomes available.

6. The insurance policy referred to in point (b) of paragraph 2 shall have at least all of the following characteristics:

(a) it has an initial term of no less than one year;

(b) the notice period for its cancellation is at least 90 days;

(c) it is taken out from an undertaking authorised to provide insurance, in accordance with Union law or national law;

(d) it is provided by a third-party entity.

7. The insurance policy referred to in point (b) of paragraph 2 shall include, without being limited to, coverage against the risk of:

(a) loss of documents;

(b) misrepresentations or misleading statements made;

(c) acts, errors or omissions resulting in a breach of:

(i)

legal and regulatory obligations;

(ii)

duty of skill and care towards clients;

(iii)

obligations of confidentiality;

(d) failure to establish, implement and maintain appropriate procedures to prevent conflicts of interest;

(e) losses arising from business disruption, system failures or process management;

(f) where applicable to the business model, gross negligence in carrying out asset valuation or credit pricing and scoring.

8. For the purposes of point (b) of paragraph 1, crowdfunding service providers shall calculate their fixed overheads for the preceding year, using figures resulting from the applicable accounting framework, by subtracting the following items from the total expenses after distribution of profits to shareholders in their most recently audited annual financial statements or, where audited statements are not available, in annual financial statements validated by national supervisors:

(a) staff bonuses and other remuneration, to the extent that they depend on a net profit of the crowdfunding service provider in the relevant year;

(b) employees’, directors’ and partners’ shares in profits;

(c) other appropriations of profits and other variable remuneration, to the extent that they are fully discretionary;

(d) shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue, and where the payment of the commission and fees payable is contingent upon the actual receipt of the commission and fees receivable; and

(e) non-recurring expenses from non-ordinary activities.

9. Where fixed expenses have been incurred on behalf of the crowdfunding service providers by third parties, and those fixed expenses are not already included within the total expenses referred to in paragraph 8, crowdfunding service providers shall take either of the following actions:

(a) where a break-down of the expenses of those third parties is available, determine the amount of fixed expenses that those third parties have incurred on their behalf and add that amount to the figure resulting from paragraph 8;

(b) where the break-down of the expenses of those third parties is not available, determine the amount of expenses incurred on their behalf by those third parties according to the crowdfunding service providers’ business plans and add that amount to the figure resulting from paragraph 8.

(1)

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

(2)

Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (OJ L 314, 5.12.2019, p. 1).