ERDEM-NEWSLETTER-2018-metin

223 CAPITAL MARKETS LAW Lending-based Crowdfunding Lending-based platforms exist in the majority of Member States. In most of the business models used for lending-based crowdfunding, platforms act as intermediaries and do not lend money directly, and only facilitate loans amongst their clients. In some business models, either the platform takes participation in the loans made through it, or a bank extends the loans on behalf of the crowd-lenders. A lending- based crowdfunding usually procures borrowers to obtain a mostly unsecured loan, and lenders to invest in the loan, in exchange for a financial return. The services, for which the platforms charge a fee, include (i) registration and checks of borrowers’ identity and eligi- bility for the loan, including their creditworthiness; (ii) online tools enabling lenders either to choose which borrower(s) to lend to, or to use automated bidding functions to better diversify their risk; (iii) set- ting an interest rate based borrowers’ credit profile or enabling online reverse auctions; (iv) processing of lenders’ money onto borrowers’ accounts, and borrowers’ repayments according to the agreed terms and (v) debt collection on behalf of lenders if borrowers do not repay on time. Depending on the business model, some of these activities and services may also be outsourced to external suppliers, including authorized payment service providers 6 . These investments have a higher return / higher risk than saving accounts offered by banks as no regulatory safeguards such as bank deposit guarantee schemes or investor protection schemes protect these investments. If the borrower defaults or the platform becomes insolvent, the crowd-lenders risk los- ing part or all of their investment. Some platforms offer provision or contingent funds to cover, mostly in part, crowd-lenders’ losses from borrowers’ defaults. However, the cumulative effect of the short his- tory of a platform, and the maturity of loans ranging up to five or more years, may render some of these contingent funds incapable to cover losses in the event of level of defaults higher than predicted. Manage- ment and money handling are, therefore, vital for the viability of the platform in a longer run, and for the protection of crowd-lenders and borrowers. 6 Working Document, p. 25.