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Murray Inquiry reveals importance of Crowdfunding

The results of Australia’s Murray Inquiry, a review into its banking system, were released this week. Significantly the inquiry offered many suggestions for the improvement of the alternative finance sector.

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The inquiry called on the government to better facilitate crowdfunding “by adjusting fundraising and lending regulations, streamlining issuers’ disclosure requirements and allowing retail investors to participate in this new market with protections such as caps on investment”. The Minister for Small Business, Bruce Bilson, had been “consulting widely” on the issue.

Treasurer Joe Hockey commented:

“We have already indicated we are quite encouraging of changes that facilitate crowdfunding.” 

New Zealand updated its commercial laws earlier this year to allow retail investors to enter the equity crowdfunding space – and we’ve seen a couple of successful platforms emerge as a result of this. PledgeMe, a crowdfunding platform, recently raised $100,000 in a funding round. At least one equity crowdfunder is expected to launch in Australia in 2015, with Equitise poised to get started in the first half of 2015.

The report also covered suggestions for peer-to-peer lending. Mr. Murray commented on the “quite unreasonable non-monetary default clauses” in loan contracts for small business and had recommended extending the coverage of unfair contracts term provisions in the ASIC Act to small business loans and business-to-business lending. He said that the onerous contractual terms offered by banks lending to small businesses would drive businesses to use alternative finance lenders.

He explained:

“If the terms and conditions of lending to SME by the existing banking system are too onerous others will step up into that market and this is what these recommendations are about.” 

He also suggests that the government updates fundraising regulation to help facilitate the crowdfunding of debt or equity, and potentially other forms of financing in the future. The report emphasises the importance of SMEs to productivity growth and job creation in the Australian economy. But smaller enterprises currently have more limited access to external funding and higher funding costs than large corporations.

Crowdfunding is emerging as an alternative around the world but in Australia current regulatory settings impede its development.

The report said:

"A well-developed crowdfunding system can aid broader innovation and competition in the financial system."

"A more accommodative regulatory regime and… crowdfunding would give some SMEs, particularly start-ups, more funding options."

There are, however, far more risks with crowdfunding compared with traditional sources of financing and the report stressed that these risks need to be clearly communicated to consumers and they would look to cap individuals’ investments.

The Inquiry looked to strengthen the banks in order to prevent a financial crisis in the future. It suggested that the Tier 1 (common equity) capital ratios for banks should rise. This would bring Australian banks in line with other international banks, many of which have had to increase their capital ratios as a result of Basel III. If the regulations surrounding the capital ratios change it will make it more expensive for banks to lend as they will have to hold more capital against their lending. This could be beneficial for alternative finance platforms, as they will become more competitive in relation to the banks.

But some of the Australian peer-to-peer lenders have already suggested that the inquiry did not go far enough. Daniel Foggo, CEO of RateSetter Australia, has said that the Australian government should use the same type of initiatives as the British government to encourage peer-to-peer lending and crowdfunding. 

Mr. Foggo commented:

“In the UK, to support P2P lending, the government is amending tax laws, and making it compulsory for banks to provide credit information to credit bureaus and to refer some clients to alternative finance providers.”

He added that peer-to-peer lenders have been shown internationally to deliver better outcomes for consumers and plug funding gaps:

“The (Murray) report acknowledges this but its own recommendations fall short of the bold policy measures that will accelerate P2P as a vibrant alternative to the big institutions.”

ThinCats Australia’s CEO Sunil Aranha commented that:

“The key barrier to entry in the financial services sector is regulation,” but complex regulation of the peer-to-peer sector wants to be avoided.

Compared to the US and the UK, transactional volumes in the Australian alternative finance sector are still very low. However, we have seen two UK platforms, ThinCats and RateSetter, set up shop there. Each of which has facilitated a great deal of money in the UK, £85 million and £421 million respectively. The Murray Inquiry contained many positive recommendations for the sector and if all the changes are implemented we could see rapid expansion in 2015.  

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