Regulation of Crowdlending the Case of Switzerland
North America leads the world in crowdlending volumes, representing 58% of the world’s market. But the global strong growth is due, in part, to the rise of Asia as a major crowdlending player with 21% of the world’s market, putting the region slightly ahead of Europe (Pignon. 2015).
As of today, Switzerland has not adopted specific regulation governing the practice of crowdlending, but the regulator has issued a fact sheet on this topic, informing the stakeholders of the crowdlending industry that some of their activities may be subject to banking regulation (Dietrich, 2015).
In this context, this article get a general overview of the regulations adopted abroad, in particular in the USA and in the European Union, where countries such as the UK or France chose to adopt a more detailed regulation, some with financial limits applicable to crowdlending campaigns or with specific requirements regarding who would be authorized to invest in crowdlending campaigns or soft regulation in the form of Best Practices.
1. Introduction
Crowdlending is not a new phenomenon in Switzerland. The first crowdlending platform based in Switzerland appeared as early as 2008, but recent numbers tend to show that this alternative finance solution gained importance mainly in the past three years (Pignon, 2015). As the practice of crowdlending developed in Switzerland and more and more platforms emerged, the question of the regulatory framework applicable to this new source of financing drew the attention of politicians and supervisory authorities (Derder, 2014). Following the path of other countries that adopted in the past years tailor-made regulations to address the specificities of crowdlending, Switzerland contemplates adopting certain statutory provisions applicable to crowdlending, in the course of a complete overhaul of the Swiss financial regulations.
Crowdlending can be defined as a form of community financing made in the form of loans from the project financers: the platform operator connects companies or individuals wishing to borrow funds to third parties, which are neither banks, nor financial intermediaries (Schneuwly, 2014). In this kind of crowdfunding campaigns, the project developer is often willing to raise funds quickly, and without having to first provide heavy warranties that would likely be requested by a bank, and the project financers will usually be rewarded by a reimbursement of their investment plus applicable interests.
From a contractual viewpoint, the relationship between the project developer and the project financer can be considered as a loan agreement. In some circumstances however, such contractual relationship can further be characterized as consumer credit. Such characterization may trigger regulatory obligations for the project financer.
Furthermore, the platform often plays an active role, managing the loan and its reimbursement and thus handling funds on behalf of the other parties (Pignon, 2015) which may trigger the application of financial regulations.
Before analysing the current regulatory framework and the scope of the contemplated new regulation, we will start by giving a brief overview of the notion of crowdlending and of the regulation issues. We will then proceed to a short comparative review of the regulations that have already been adopted in other countries on that matter. We will conclude with some thoughts on other possible future evolutions of the Swiss regulation framework of crowdlending.
2. Regulation of crowdlending in Switzerland and Regulatory frameworks implemented outside of Switzerland
The current Swiss regulatory framework for financial activities does not contain any specific rules regarding crowdlending activities. The regulatory status of the platform operator, the project developer and the project financer, must therefore be assessed under the ordinary rules governing the provision of financial services in Switzerland (Essebier, 2015). As will be shown below, comparatively small changes to a crowdfunding scheme can trigger major implications from a regulatory perspective.
Certain jurisdictions outside of Switzerland have implemented a regulatory framework dedicated specifically to crowdfunding (Brüntje, 2015).
3. Conclusions
As many anticipated, Switzerland followed the path of the United States and of European countries and is now considering taking the opportunity of a complete overhaul of its financial regulations to adopt specific rules aiming at crowdlending platforms. The adoption of a clear regulatory framework was indeed called for by many crowdlending professionals in Switzerland (Pignon, 2015), who deplored the lack of certainty of the current regime and lobbied in favour of a clear framework as a necessity to favour the development of crowdlending in Switzerland. Some authors however warn that overregulating or adopting regulation that does not take into account the specificities of crowdlending could backfire and result in stopping the current growth of crowdlending in Switzerland (Dietrich, 2015).
In its current form, the proposed regulation appears to mainly address the risk of uncertainty of application of the banking regulation, and to provide for a light regulatory framework while ensuring a minimum protection of the project financers by setting forth an obligation to provide minimum information on the project (Lee, 2012). Contrary to some of its neighbours, Switzerland thus did not choose to adopt a detailed regulation, limiting access to confirmed professionals or setting financial thresholds to protect both project developers and project financers.
Although these measures proposed to clarify the current regime and to provide for a light regulation can be saluted as a first step to find balance between the necessary flexibility of crowdlending and the protection of the interests of the project developers and financers, one cannot help but note that the regulatory framework may not be the only hurdle, preventing crowdlending to develop in Switzerland. This would be a form of self-regulation which has a long and relatively successful tradition in the Swiss financial regulatory environment.