Collaborative economy: evidence analysis

4 Collaborative Financing

4.1 This section provides an overview of responses in relation to the collaborative financing sector. These findings are based on responses from two businesses active in the sector, and a small number of other respondent types.

Opportunities for the collaborative economy

4.2 Respondents referred to a range of potential opportunities and benefits in relation to collaborative financing:

• Several respondents - including collaborative finance businesses, business representatives and public sector respondents - referred to scope for collaborative finance to expand the range of people engaged in the collaborative economy. This included reference to enabling those in more rural and disconnected parts of Scotland to engage with a wider network of collaborators and customers, potential new funding opportunities for third sector and social enterprise development, and potential to enable individuals with minimal capital to develop new ideas. A business representative respondent also suggested that collaborative financing can help to address long-standing issues around the range of finance options available to smaller businesses.
• A collaborative finance business respondent suggested that Scotland has an opportunity to create a robust and inclusive collaborative economy that can benefit all stakeholders - enabling businesses and platforms to thrive, benefiting consumers, and addressing the needs and concerns of communities. This included a suggestion that growth of collaborative economies in other territories has been based on an adversarial approach between platforms and governments, and as a result has been less inclusive. This respondent saw an opportunity for the Scottish Government to establish the regulatory and economic frameworks to enable development of a more inclusive collaborative economy.
• A collaborative finance business respondent referred to the strength of digital expertise and entrepreneurial networks in Scotland as providing opportunities for development of new approaches and ideas.
• A public sector respondent referred to a local partnership which seeks to use collaborative finance to provide funds to support community, business, sports and social enterprise, and which was seen as having been effective in raising awareness and buy-in from consumers and businesses. ^[11]
• A public sector respondent expected to see an increase in collaborative financing, and suggested that this may be on a more commercial equity basis.
• A business representative respondent cited examples of collaborative financing outwith the UK, which could have a role for collaborative providers in Scotland. This included reference to collective insurance schemes such as bread funds.

Challenges for the collaborative economy

4.3 Key challenges for collaborative financing raised by respondents were:

• A collaborative finance business provider suggested that mistrust, misunderstanding and what was seen as an adversarial approach between stakeholders is a key challenge for the collaborative economy. This included specific reference to concerns that excessive regulation will not respect the preferences of the public or smaller providers, aggressive market entry approaches that do not take account of local circumstances, and a need to ensure the public is properly informed. This respondent also raised concerns that the highest profile collaborative platforms will define the market in their own interests, without regard to the diversity of services being offered. This was related to a suggestion that ongoing engagement will be required to ensure regulatory and economic frameworks are based on a genuine understanding of the nature of the collaborative economy.
• Connectivity was raised as a challenge, and as potentially limiting opportunities for rural communities to participate in the collaborative economy. It was also suggested that digital skills can be a barrier to some demographic groups accessing the collaborative economy, including specific reference to deprived urban communities.
• A collaborative finance respondent raised concerns that entrepreneurial support structures can be focused on specific demographics, and that more diverse support is required.
• Financial risks and failure to honour obligations were mentioned as significant challenges by another organisation respondent. It was suggested that these concerns could act as a barrier to individuals or businesses engaging with the sector.

Protection of contributors

4.4 A small number of respondents made reference to issues around protecting contributors to collaborative financing:

• A collaborative finance business respondent suggested that existing legislation and regulation may not be fit for purpose to ensure suitable protections for those contributing to the collaborative economy. This respondent noted that regulations were produced prior to the development of many of the technologies on which the collaborative economy is based, and as such cannot adapt to the challenges and opportunities associated with the collaborative economy.
• A business representative respondent referred to specific collaborative finance innovations such as mutual sick pay funds and cash-pooling schemes. These were seen as having a potentially significant role for providers of collaborative economy services who wish to self-organise to mitigate the risks that they face.
• A public sector respondent noted that existing legislative and regulatory protections may not fit well with aspects of the collaborative economy based on trust and mutual benefit - such as collaborative finance. This respondent suggested there may be a need to review legislation to ensure adequate protections for consumers and providers.

Balancing regulation with competition and innovation

4.5 Points raised by respondents in relation to balancing regulation and competition/innovation within collaborative financing included:

• A collaborative finance respondent proposed a more collaborative approach to regulation, described as shared regulation. This proposal was based on collaborative platforms being seen as one of a range of actors within the regulatory framework, alongside government. Other stakeholders would include consumers, workers and other providers, community organisers, legal and other professionals, investors and designers. The regulatory approach would be structured around a shared goal, with the full range of stakeholders having a role to play alongside government.
• Another collaborative finance business respondent again suggested that existing legislation and regulation may not be fit for purpose to ensure suitable protections for those contributing to the collaborative economy.
• A public sector respondent made reference to potential issues for crowdfunding approaches where consumers may not understand the implications when investing or contracting. This respondent suggested that there is a risk of large scale fraud or consumer protection offences, and that awareness raising is required to ensure that contributors understand the legal implications of their involvement.

Barriers to growth of the collaborative economy

4.6 Respondents identified few specific barriers to growth in relation to collaborative financing. Indeed, one respondent suggested that the issues facing the collaborative finance sector were global or European-wide, rather than being specific to Scotland. Nevertheless, it was noted that Scotland has a unique opportunity to address these barriers through an appropriate regulatory approach.

4.7 In terms of specific barriers to growth of the collaborative finance sector, the only specific suggestion was limited broadband and 3G/4G connectivity across parts of Scotland.

The role of government

4.8 Key points raised by respondents on the role of the government in relation to collaborative financing were:

• A collaborative finance respondent noted that many of the barriers evident in Scotland reflect global issues. This respondent called for a mainstreaming approach that put the collaborative economy at the heart of the Scottish economy.
• Another collaborative finance business respondent felt that broadband connectivity was a structural issue and should be a priority for the government - particularly in rural areas. This respondent also wished to see Scottish Government guidance clarifying the law as it related to workers and businesses in the collaborative economy. This included a suggestion for a dedicated advice service for gig economy workers.
• A public sector respondent suggested that government guidance would be required to steer any expansion of collaborative finance into the public sector.