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EU Closes In On Cross-Border Crowdfunding

The push to make access to alternative lending easier for small businesses across the European Union just received a cautious stamp of approval from lawmakers in the United Kingdom. Calling the European Commission’s green paper, which outlines the need for capital markets reforms, a “welcome and necessary step in promoting a sustainable economic recovery,” the U.K. House of Lords’ European Union subcommittee expressed support for the creation of a unified capital market.

Published in February, the Commission’s report explores how legislation could improve access to funding for SMEs. Backing from one of Europe’s most successful and mature markets for alternative funding could go a long way toward the creation of a single market, diversifying access to capital for Europe’s small businesses.

SMEs in the U.K., like those across Europe, are still heavily reliant on banks for funding. But traditional lending remains depressed following the financial crisis, leaving small business searching for alternatives. Reliance on reduced traditional bank-based lending is limiting the growth of SMEs and stalling job growth, especially as other nations embrace non-bank funding. For comparison, the European Commission’s research shows SMEs in the United States receive five times more equity finding than their European counterparts. If Europe’s capital market were equal to the market in the U.S., European small businesses would have had access to nearly $100 billon in capital between 2008 and 2013.

“For far too long in the EU we have been reliant on traditional sources of funding, and it is becoming increasingly clear that there is a huge opportunity that lies beyond the banking sector,” the authors of the House of Lords report note. “One need only look at some of our international competitors, such as the U.S., where alternative credit is now very much part of the funding furniture, and making a real difference.”

Border Crossing

The popularity of alternative finance is surging across Europe, but most of the lending is on a national basis. There is little data specifically detailing cross-border lending in Europe, but a report from the University of Cambridge and EY estimates that figures are small. A unified capital market would more directly connect businesses in need of funds with investors, regardless of location. A pan-European market would also expose nations with less developed capital markets to those with mature markets. The U.K., having a mature alternative financing market, could share its experience and expertise with those less experienced, the House of Lords report said. Additional advantages of integrated markets include limiting risk and the ability to attract more foreign investment.

While the report shows U.K. lawmakers support the approach outlined by the European Commission, it also highlights several challenges that could prevent movement toward a single market. The House of Lords report shows concern at the number of wide-ranging proposals covered in the Commission’s paper, and encourages limiting the focus to those measures that will most directly impact economic growth and job growth. Designing a single policy to address the individual concerns and economic conditions in each of the 28 Member States will be an uphill battle, as the development of a pan-European market will be limited by the ability to address the varying lending rules in each country. The House of Lords report was particularly concerned with the ability to address differing tax structures, legal concerns and oversight.

Regulation could also prove to be expensive; the report cautions against underestimating the cost of enforcing compliance. Arriving at a consensus across 28 different nations may be difficult, but the report’s authors say that it should not prevent policymakers from moving forward in the creation of a Capital Markets Union. Until then, the European Commission is still accepting feedback on the creation of a Capital Markets Union and hopes to have a finalized proposal by 2019.

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