PEER-TO-PEER lenders are restricted from scaling across Europe due to an incoherent regulatory framework and tax regime, a report warns.
The European Commission’s Directorate General for Financial Stability, Financial Services and Capital Markets Union has analysed barriers to P2P firms operating across borders.
Written by the European Crowdfunding Network (ECN), the report highlights concerns over inconsistent rules on regulatory compliance, information disclosure and tax.
It says that there does not seem to be a well-developed and internationally coordinated regulatory strategy for the digital transformation of financial services by EU institutions, similar to how banks are allowed to operate.
The analysis calls for clarity on how lender and borrower data can be used across borders and also suggests the development of a digital identity that can be used in all EU member states to make transactions faster and more secure.
Differing interpretations of regulatory rules are also cited as a barrier, the report warns. For example, while banks can use the EU Mifid Directive to passport their services in different countries, individual regulators seem to interpret differently what is and isn’t allowed for P2P lenders across borders.
This often leads to firms having to set up and be regulated in individual member states which can be more expensive, the report said.
The report cites two case studies that illustrate the inconsistent way rules are applied.
One example is Lendhahand, a Dutch P2P lender that provides loans to entrepreneurs in the developing world. It operates in Belgium and Finland but cannot use its Mifid permissions in Germany and the UK.
“What the regulators could do better is put effort into simplifying the authorisation and compliance process,” the report said.
“It is proposed that this could be achieved with the establishment of a pan-European crowdfunding regulatory framework that all crowdfunding stakeholders will have to comply with.”
The other example is Finnish P2P bonds provider Invesdor, which is able to operate in the UK, but faces tax issues.
“Having different tax structures in every member state makes cross-border business difficult,” it said. “For example, a harmonised approach as to what is tax-deductible and what is a tax benefit, leaving room for national variations limited to a percentage range, would make a noticeable difference in cross-border crowdfunding.
“Finally, technological developments are a big milestone in building an effective regulatory framework. For example, know-your-customer models that make the screening of investors more efficient, the improvement of payment processes on the platform and a European digital authentication would ensure the path towards completely unfettered digital cross-border business.”
Oliver Gajda, executive director of the ECN, said the report highlights a lack of guidance for providers working in a digital world.
“Based on the evidence gathered by our work, the P2P finance sector remains characterised by its highly heterogeneous nature, shaped by the different starting points of nascent national markets across the EU,” he said.
“It shows that incumbent regulatory frameworks provide insufficient guidance for digitally mediated market exchange.”
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