Following on from existing legislation, the Financial Conduct Authority (FCA) has put forward rules to provide consumer protection.
In differentiating the two main forms of crowdfunding, investment-based and loan-based, the FCA is attempting to make separate rules to govern both options. Crowdfunding in the UK is worth approximately £360 million, with 90 per cent done through peer-to-peer platforms
From 2014, the FCA will be taking over consumer credit, of which loan-based crowdfunding is identified as, from the Office of Fair Trading.
The regulatory body says that, for investment-based activity, it is ‘tailoring’ an existing rulebook rather than creating a new one. It suggests that, in the retail market, businesses can only promote crowdfunding platforms to sophisticated investors, high net worths or retail clients receiving regulated advice or certifying that they will not be committing more than 10 per cent of the portfolio.
For non-advised clients, the FCA proposes that businesses must ‘assess appropriateness’ before allowing them to commit funds through a platform. Restrictions that are already in place regarding marketing of unregulated collective investment schemes will apply to platforms that offer these investments.
Darren Westlake, CEO of investment-based platform Crowdcube, says, ‘We are delighted that many of the measures proposed by the FCA are already in line with how Crowdcube operates today.
‘It is critical that equity crowdfunding is more accessible to everyday investors, which today’s consultation goes some way to achieve. We shall respond to the FCA consultation directly to ensure that the crowd remains in crowdfunding and the industry can continue to flourish.’
In March of 2013, crowdfunding platforms including Crowdcube, Seedrs and CrowdBnk cane together to form a self-regulatory body. The UK Crowdfunding Association (UKCFA) is an institution which will provide consumer protection.
More on crowdfunding:
Christopher Woolard, FCA director of policy, risk and research, comments, ‘Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are.
‘Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding.’
On the loan front, the FCA would like information about platforms to be clearly presented and easy to find. Communications, it proposes, must be understandable and not downplay the risk involved.
In a situation where a particular platform collapses, resolution plans must be in place so that loan repayments will continue to be collected.
James Meekings, co-founder and CMO of Funding Circle, which recently secured $37 million of venture capital to tackle the American market, says that new regulation will help to cement the long-term position of peer-to-peer lending in the financial landscape.
‘The industry has been in conversation with regulators for many months and today’s outcome is very positive,’ he adds.
‘The FCA has shown foresight in striking the balance between enabling the industry to continue to flourish while ensuring the protection of consumers and businesses.’
A minim prudential requirement: either a percentage of loaned funds or a fixed minimum of £50,000 (depending on what is higher) is another proposal put forward by the FCA.