Commission Delegated Regulation (EU) 2022/2118 of 13 July 2022 supplementing Regulation (EU) 2020/1503 of the European Parliament and of the Council with regard to regulatory technical standards on individual portfolio management of loans by crowdfunding service providers, specifying the elements of the method to assess credit risk, the information on each individual portfolio to be disclosed to investors, and the policies and procedures required in relation to contingency funds (Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, (1) and in particular Article 6(7), thereof,

Whereas:

(1) When investing in a portfolio of loans offered by a crowdfunding service provider, investors do not select the projects in which they will invest their funds, but rather select a number of parameters and risk indicators and leave to the crowdfunding service provider the task of allocating the funds accordingly. Therefore, the crowdfunding service provider should disclose appropriate levels of information to prospective and current investors, allowing those investors to have sufficient knowledge about the returns and risks of the projects and make informed decisions.

(2) In order to reduce the information asymmetry between crowdfunding service providers and investors, investors should be provided with all the relevant information about the composition of the portfolio, including the projects where their funds are invested, as well as the quality of the loans financing those projects. That should allow investors to better understand and compare the performance and riskiness of different portfolios, either offered on the same platform or on alternative platforms.

(3) Investors are exposed not only to risks connected to the projects or the loans in which their funds are invested, but also to the way the crowdfunding service provider assesses the risk of those loans and projects and how that provider manages the selection of loans for the portfolio. In that respect, performing stress tests on the portfolio and sensitivity analysis on the single loan and the single project owner can be particularly effective in providing a thorough and complete assessment of the investments. It is hence appropriate that, when the crowdfunding service provider performs such stress tests, the results of those analyses are disclosed to investors.

(4) In order to ensure effective transparency, the information about the elements to be included by the crowdfunding service provider in the method employed to perform credit risk assessments should be disclosed appropriately. That will allow investors to understand whether an adequate and prudential approach is taken by crowdfunding service providers in the process of assessing the sustainability of projects being financed, the affordability of the loans for the project owners, and the composition of the individual loans in a structured portfolio.

(5) A crowdfunding service provider may rely on a dedicated contingency fund to compensate investors for the losses those investors may incur in the event that project owners do not repay their loans. Investors will need to be made aware that the mere existence of such contingency fund does not provide a guarantee that the investment can be considered risk-free and that they will be reimbursed in the event that the loan they have financed is in default, as there is absolute discretion on the part of the crowdfunding service provider to decide on any payments. In order to ensure adequate investor protection, it is important that crowdfunding service providers have in place appropriate policies and governance arrangements when managing, either directly or through a third-party provider, contingency funds.

(6) This Regulation is based on the draft regulatory technical standards developed by the EBA in close cooperation with ESMA and submitted to the Commission.

(7) The EBA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (2).

(8) The European Data Protection Supervisor was consulted in accordance with Article 42(1) of Regulation (EU) 2018/1725 of the European Parliament and of the Council (3) and delivered an opinion on 1 June 2022,

HAS ADOPTED THIS REGULATION:

CHAPTER I

General provisions

Article 1

Accuracy and reliability of information to be provided to investors

(a) the data used to conduct the assessments of creditworthiness referred to in Chapter II of this Regulation are consistent, complete and appropriate;

(b) the measurement techniques are appropriate to the complexity and level of the risks underlying the single crowdfunding projects and/or the portfolios, are based on reliable data, and are subject to periodic validation; and

(c) the procedures relating to data management are robust well documented, reliable and regularly updated.

Article 2

Format of the information to be disclosed

CHAPTER II

Elements, including the format, to be included in the description of the method to assess credit risk

Article 3

Credit risk of individual crowdfunding projects

The description provided to investors of the method to assess the credit risk of individual crowdfunding projects within a portfolio as referred to in Article 6(2), point (a) of Regulation (EU) 2020/1503, shall contain all of the following elements:

(a) the criteria and the key financial indicators used to establish the feasibility and sustainability of the business plans of the individual crowdfunding projects;

(b) an analysis of the expected cash flows of the crowdfunding projects and an assessment of how certain those expected cash flows are over different time horizons;

(c) an analysis of the characteristics, including the degree of competition, of the business sector in which the project owners operate;

(d) an assessment of the project owners’ knowledge, experience, reputation and capacity to manage business activities in the project’s specific sector;

(e) the procedures regarding the acceptance and recognition of collateral or guarantee and credit risk mitigation measures, where relevant;

(f) the type of the repayment schedule for the loan and the frequency of instalments;

(g) the procedures to assign each loan associated with a project to an appropriate risk category as defined by the risk management framework;

(h) the source and type of data used for the purposes of points (a) to (g).

Article 4

Credit risk at the investor’s portfolio level

(a) the distribution of loans in accordance with their maturity within the same portfolio;

(b) the interest rate for each loan of the same portfolio;

(c) the share of loans in a single portfolio granted to the same project owner or to a group of connected project owners;

(d) the share of loans in a single portfolio granted to project owners established or operating in the same jurisdiction or geographical area;

(e) the share of loans in a single portfolio granted to project owners operating in the same business sector;

(f) the share of loans assigned to the same risk category;

(g) the method used to evaluate the correlation of risks within the same portfolio.

(a) two or more natural or legal persons who constitute a single risk because one of them, directly or indirectly, has control over the other or others;

(b) two or more natural or legal persons are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would also be likely to encounter funding or repayment difficulties.

Article 5

Credit risk of project owners

The description provided to investors of the method used to assess the credit risk of project owners as referred to in Article 6(2), point (c) of Regulation (EU) 2020/1503, shall contain all of the following elements:

(a) the procedures for the credit approval and monitoring processes;

(b) the procedures to determine the project owner’s credit scoring, where applicable;

(c) the procedures for using external ratings for assessing a project owner’s creditworthiness;

(d) the procedures regarding the acceptance and recognition of collateral or guarantee and credit risk mitigation measures, where relevant;

(e) the procedures and data used to assess the financial history of the project owner and the procedures to be followed in the event that the project owner fails or refuses to provide the required information.

Article 6

Use of models

(a) the source of the data used as input for the models;

(b) the framework employed to ensure the quality of the input data;

(c) the existence of appropriate governance arrangements for the design and use of such models;

(d) the framework to ensure that the quality of the model output is regularly assessed and validated, and where appropriate, reviewed.

(a) how the use of automated models is appropriate to the size, nature and complexity of the types of crowdfunding project selected for the investor’s portfolio;

(b) the conditions for the application of automated decision-making in the credit-approval and monitoring processes, including identifying loans, segments and limits for which automated decision-making is allowed.

Article 7

Information on stress testing and sensitivity analysis

Crowdfunding service providers that conduct stress test and sensitivity analysis exercises shall provide investors with information on all of the following:

(a) at the level of the single loan and single project owner, any sensitivity analyses conducted to reflect potentially negative future market and idiosyncratic events that are relevant to the type and purpose of the loan;

(b) at the level of the portfolio, the procedures and information systems for stress testing that are conducted to assess the resilience of the portfolio through the economic cycle and in different scenarios.

CHAPTER III

Information to be provided on each individual portfolio

Article 8

Calculation of the weighted average annual interest rate

(a) that the denominator consists of the sum of the notional amount of every loan included in the portfolio;

(a) in the case of a fixed interest rate, the annual interest rate as laid down in the loan contract;

(b) in the case of a variable interest rate, the interest rate in force at the time of the publication of the weighted average annual interest rate, taking into account any upper limit as laid down in the loan contract;

(c) in cases in which the loan is split into tranches earning different interest rates, the weighted average of the interest rates as laid down in the loan contract.

Article 9

Distribution of loans according to risk category

(a) the distribution of loans according to risk category in absolute numbers shall refer to the sum of the notional amount of every loan in the same risk category;

Article 10

Key information for every loan included in the portfolio

(a) the amount of the loan, including the most recent outstanding balance;

(b) the currency in which the loan is granted;

(c) the entity responsible for the servicing of the loan, including its legal name, registration number and place of registration, registered office and contact details, and its servicing policy;

(d) the identity of the project owner, including indicating its legal name, the country of incorporation and registration number, the address of its registered office and its corporate website;

(e) the ownership structure of the project owner;

(f) the purpose of the loan, by adding a brief description of the crowdfunding project;

(g) the interest rate or any other compensation laid down in the loan, for each year until maturity, and where the interest rate or any other compensation is not directly available, the calculation method;

(h) the maturity date of the loan;

(i) the relevant risk category to which the loan is assigned in accordance with the risk management framework referred to in Article 4(4), point (f) of Regulation (EU) 2020/1503;

(j) the schedule for the repayment of the principal and for the payment of interest on the loan;

(k) the compliance of the project owner with the instalment payment schedule of the loan by indicating any past due payment or any default as referred to in Article 1(1) of Commission Delegated Regulation (EU) 2022/2115 (4);

(a) the type of offer and the instrument used for financing the project;

(b) the completion date (past or expected);

(c) the notional amount that the project owner is borrowing;

(d) other relevant information, including all other financial obligations and contingent liabilities.