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Developing equity financing in the EU - Financing of the EU economy

Can FinTech solutions help to further develop SME equity financing?

By Lawton David - Director of Markets Policy & International, Financial Conduct Authority (FCA)

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The answer is “yes”. As with so much in modern life, technology offers transformative possibilities to improve, make more efficient and open up new opportunities for the way companies go about financing themselves. This is certainly the case with small and medium size enterprises (SMEs), which many commentators argue generally lack the scale to utilise existing forms of finance – particularly traditional forms of equity finance. But in the same way that someone selling consumer goods can now do so cheaply via online auction sites, without spending thousands on business premises, so-called ‘FinTech’ provides potential answers to address similar problems of scalability.

And answers are welcome. While banks, and perhaps debt financing will always be an important component of new, small and growing businesses’ operations, effective equity financing could provide a real boost to SMEs during their growth phase, provided the economics of arranging it make sense.

So what ‘FinTech’ exists in this space? Well, most significant are investment-based crowd-funding platforms, of which there are around 22 in the UK with an investment focus, as opposed to a debt focus. These firms utilise websites and mobile apps, and in 2015 raised about £245m for SMEs. We expect this figure to continue to grow. And as it grows, so does the potential for regulatory (conduct, prudential and sector stability) issues as seen in more established parts of the industry. There is a balance to be struck here though between regulation to protect both investors and SMEs, and imposing burdens that significantly discourage such firms from operating and providing useful services. For this reason, the FCA has developed what we think is a balanced and proportionate regulatory regime.

Encouraging innovation and ensuring regulation is proportionate are both important and necessary to support SMEs.

Other ‘FinTech’ innovations likely already exist or are being dreamt up as we speak. Blockchain, ‘cloud services’ and new mobile apps offer huge promise. This is what makes the sector exciting at this time, and we’ll be considering new models and supporting new ideas through the FCA Innovation Hub when and where we can.

But we believe there is more that can be done with existing players and forms of equity financing too, and perhaps regulatory change can support this. A key example would be the changes we are encouraging to be made to EU prospectus rules as part of the Capital Markets Union programme. Existing rules are very much aimed at the largest corporate issuers, and the costs and burdens of compliance can dis-incentivise SMEs from pursuing listing. Our view is that issuers and investors could benefit from a dedicated regime targeted at smaller companies that recognises the different nature of SMEs. For this reason, we are supporting and working closely with the UK Government and European partners to share ideas on prospectuses and possible amendments to regulation.

I’m sure you’ll agree that encouraging innovation and ensuring regulation is proportionate are both important and necessary to support SMEs, which are the large businesses of the future. I look forward to debating further ideas with attendees at this Eurofi conference.