IAFEI Quarterly - 33rd Issue

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This is to become especially significant when new Basel
Committee on Banking Supervision regulation deman-
ding a 300 per cent risk weight to be applied to small
business credit at the banks’ balance sheets go into
effect. Second, this kind of arrangement is mutually
beneficial for a number of reasons: the agreement is
a two-way venue, with the online portal also referring
its clients able to get traditional loans to the banks in
cases where it may be better suited to the borrower’s
needs and for other traditional banking services. In this
way, banks can focus on building relationships and provi-
ding a range of services for clients it deems more strategic
while also better managing its capital ratios in light of the
aforementioned new Basel rules.
Equity-based crowdfunding has also amassed public
attention, increasing its total volume raised from 5
million euro in 2012 to over 110 million just two years
later, according to a private report by Ernst & Young and
Cambridge University based on a survey with several of the
leading online platforms in the UK 8. The importance of duly
regulating this market can be best understood when one
realizes that, as a new and inherently risky funding model,
a single big platform fail or rotten investment scheme can
have negative spillover effects. Thus, many platforms in
the UK actually sought to be regulated, and voluntarily
added risk warnings and disclaimers on their portals9 even
before the Policy Statement by the Financial Conduct
Authority went into effect limiting the illiquid allocation of
individuals - unless they either have professional support,
or are considered high net worth or “qualified” investors,
measures that should be emulated elsewhere10.
Finally, the general perception towards collective
investment in the UK on meetings with British institutions
was that although it indeed had been playing a part in
improving the scene for SME financing, it would hardly in
the foreseeable future disrupt traditional banking primacy
nor eliminate SME funding constraints. This can be noted,
for instance, when one realizes that although the volume
of loans provided by the leading platform FC was over 1.3
billion pounds as of June, 2016, the number of individuals
who have lent through that portal was just over 50,000.
8
dfunding/150304-presentations-ecsf_en.pdf
9 Where one reads, for instance, quoting a warning at crow-
: “The majority of start-up businesses fail or do not scale as
planned and therefore investing in these businesses may involve signifi-
cant risk. It is likely that you may lose all, or part, of your investment”.
10 In Brazil, the regulator CVM builds on pre-existing rules to
simplify the registration process provided that certain size parameters
are observed, but a specific framework focusing on this investment ap-
proach is still undergoing public debate in 2016, and the country’s lar-
gest online platforms are working via convertible debt issuance.
VI. Fiscal incentives
Fiscal incentives, unless a due cost-benefit budget impact
assessment is provided, may be regarded by some
observers as wishful thinking – especially against the
current global economic setting, in which policymakers
face growing fiscal constraints arising from diminishing
tax receipts. Still, evidence support the key role played
by fiscal benefits to equity investments in micro and
small companies in the UK in recent years11. Thus, such
benefits should be considered by any country seeking
to improve SME funding possibilities, and private agents
should strive to advance the policy debate.
Indeed, Brazil has taken steps in this direction in 2014
with the exemption of income tax in investments in
SME’s stocks by individual investors. However, the lack
of a culture in stock investments (not to mention the
poor performance of the overall Brazilian market in
recent years) as well as the risk of steep losses stemming
from such have hampered significant outcomes from
this benefit. This point shed light on the importance of
the mechanisms of the benefits provided by the British
government, namely the SEIS, EIS and the VCT12. These
programs, offered for investments via different kinds
of platforms13, have in common that not only a fiscal
benefit will be obtained in case the initial investment
appreciates, but, if held for a relevant period, can
provide a substantial financial offsetting in case a young
business fails and the capital invested would otherwise
be lost.
Since fear of losing a significant part or all of its
investment is usually the main constraint burdening
the minds of individual savers, it is likely that similar
initiatives, tailored to each countries’ realities, would
achieve positive results and ultimately aid in job
generation with limited net budget impact, as it was
consensual among relevant institutions, it is happening
at some degree in the UK.
11 In particular, please see the document at http://www2.
deloitte-uk-taking-the-pulse-of-the-angel-market.pdf, whereby one can
note that around three quarters of investors surveyed said the fiscal be-
nefits available to investors in the UK were crucial in their decision to
invest, and 58% said they would in fact had invested less if such benefits
weren’t available.
12 For a detailed explanation of these schemes, we refer to: ht-
13 Usually crowdfunding, angel syndicates, etc. However, fiscal
incentives have also been provided in the UK to the banking industry,
focusing on challenger banks, via subsidized rates from the Treasury’s
Funding for Lending Scheme - provided that funds were lent to SME.