Newsletter - The Norwegian FSA finally provides guidance on debt crowdfunding
On 4 December 2017, the Financial Supervisory Authority of Norway (FSAN) published a Circular (10/2017) in which it provides guidance on how crowdfunding – peer to peer lending – can be conducted in Norway. Debt crowdfunding arranged by third parties normally consists of loan intermediation with the addition of payment services where an intermediary also handles payments between the parties (lenders and borrowers). Given the absence of a clear legal framework for crowdfunding, the circular provides valuable guidance on how such activities can be offered in Norway.
At the outset, crowdfunding is subject to light-touch regulatory requirements in Norway. These are far less extensive than those applying to banks and credit institutions. It is sufficient for an operator of a crowdfunding platform (the Crowdfunding Operator) to be registered with the FSAN as a loan intermediary and to be licensed as a payment service provider if it handles payments between parties in a loan arrangement. In the circular, the FSAN clarifies (i) how to draw the line between loan intermediation and other financing activities subject to licence requirements, (ii) how to avoid lenders/investors on the crowdfunding platform being considered as providing financing activities and (iii) restrictions on a payment service providers' right to hold investors' funds on their accounts in connection with transmission of payments between lenders and borrowers.
Overall, it is worth noting that the statutory provisions regulating crowdfunding businesses are not designed for this purpose and that the FSAN's interpretation set out in the circular may appear quite strict. As such, the legal framework for crowdfunding in Norway is not satisfactory and a modernisation is long overdue.
Loan intermediation versus financing activities
A loan intermediary must be an independent third party between a borrower and a lender. With this background, the FSAN assumes that at least the following factors must be fulfilled in order for a Crowdfunding Operator to be classified as a loan intermediary:
- a loan agreement must be entered into between each lender and each borrower and the Crowdfunding Operator cannot be a party to the agreement or be authorised to sign, enter into, or renegotiate, the loan agreement on behalf of the parties;
- a Crowdfunding Operator cannot advise a lender or borrower to enter into loans or advise one of the parties during the term of a loan. The decision to grant or take up a loan must be made by the lender and borrower;
- a lender and borrower must be aware of each other's identity;
- a Crowdfunding Operator cannot, on behalf of the lenders, split/distribute the lenders` investments into several loans (and the platform cannot do this automatically);
- a Crowdfunding Operator may not be a legal representative, agent or trustee of a lender or a borrower prior to the conclusion of a loan or during the term of a loan;
- a Crowdfunding Operator cannot distribute losses between lenders in different loans; and
- a Crowdfunding Operator must ensure that repayments from borrowers are paid immediately to lenders.
How to avoid investors becoming subject to license requirements
Pursuant to Norwegian finance law, provision of credit is, at the outset, subject to license requirements, regardless of how such activities are financed. Hence, lenders/investors on a crowdfunding platform may be considered to be performing financing activities if they engage in "financing activities".
There is however, an exemption for "one-off" financing, i.e. financing provided in individual cases (in Norwegian: "enkeltstående tilfeller"). The circular does not provide any clear guidance as to how this exemption is to be applied to lenders/investors on crowdfunding platforms. The FSAN provides that loans cannot be given on "numerous occasions" ("en rekke ganger"). The assessment must be made on a case-by-case basis based on factors such as the size of the amount, the number of loans, the lending rate and the duration of the lender's lending activities. An individual lender's financial position and purpose for lending out funds will also be important factors.
Restrictions on holding investors' funds
If a Crowdfunding Operator undertakes a settlement function for payment and repayment of loans, it will be required to hold a payment service provider license.
As a payment service provider, a Crowdfunding Operator may transmit funds between the lender and the borrower. However, the FSAN is of the view that a Crowdfunding Operator cannot hold deposits on its client account without a banking licence. Accordingly, a Crowdfunding Operator can only receive money as part of the execution of a payment service and hold the funds to the extent required for this purpose; i.e. for transfer payments and re-payments between the parties.
With this background, the FSAN states in the circular that a Crowdfunding Operator cannot, without a banking license:
- receive payments from a lender into its client account before a loan agreement has been agreed;
- allow a lender or a borrower to have money deposited on its client account beyond the period it normally takes to make a payment order;
- allow a borrower to deposit an amount into its client account, even if the purpose is for the payment of interest or installments at a later stage or to serve as a guarantee for any payment breach; and
- permit a lender or a borrower to keep funds in a client account other than where there is a specific payment that will immediately be transferred to the other party.
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