CMU set to transform SME investment landscape

Funding Circle is optimistic about the finalisation of the Capital Markets Union (CMU) and the possibility of a harmonised European regulatory framework to facilitate cross-border lending and investment. In particular, the firm believes that the regulatory package has the potential to transform the ability of investors on a global level to both invest in SME loans and securitise them.

After Funding Circle acquired ZenCap last year, it gained a presence in the Netherlands, Spain and Germany on top of its established UK and US bases. The platform therefore hopes to engage investors and borrowers across Europe on a retail and institutional level. However, the existing regulatory framework currently makes this kind of pan-European activity unattractive due to both complexity and cost.

From the perspective of boosting Funding Circle's activity and for the growth of the European economy, Sachin Patel, global co-head of capital markets at the firm, feels strongly that a simpler regulatory framework is vital. This is particularly true in terms of enabling firms to invest in SME loans through Funding Circle's platform and then securitising them if desired.

Patel states: "If investors could securitise Funding Circle loans and other investors could then invest in them globally without the potentially large costs, this would help to further diversify the capital available to small businesses on the marketplace."

He also highlights that development of the CMU has the potential to transform the ability of investors on a global level to both invest in SME loans and securitise them, opening them up to a wider market.

Of the CMU, Patel is optimistic about its potential for marketplace lenders and also in helping Europe rival the US. He says: "There is a real chance to build up our own capital market to match the US. By harmonising regulation from country to country, we can not only facilitate a stronger capital market, but also help build the European recovery."

In terms of the regulatory barriers standing in the way of global marketplace lending currently, the main issues are a fragmented tax framework across Europe, with different tax laws applying from country to country. One of the benefits of the CMU is that it might enable a standardised taxation framework, as well as streamlining anti-money laundering and 'know your customer' procedures.

In reiterating the investor benefits of removing pan-European regulatory barriers, Patel also suggests it could help to provide a buffer to a change in the credit cycle. He concludes: "Investors would love to have a globally diversified portfolio, including the rest of Europe and not just UK and US marketplace loans, and this could also provide a counter-cyclical stabiliser in the event of a downturn."

RB