Crowdfunding is a method through which people, organisations and businesses, including business start-ups, can raise money through online portals to finance or re-finance their activities. It provides a platform that matches up potential lenders with potential borrowers or potential investors with potential investments.
The FCA regulates loan-based crowdfunding platforms, through which people and institutions lend money to consumers or businesses in the expectation of a financial return, and investment-based crowdfunding platforms, through which people invest in non-readily realisable shares or debt securities issued by businesses.
The FCA's new rules to protect loan-based and investment-based crowdfunding came into force in April 2014 and it is currently in the process of carrying out a post-implementation review. The FCA's aim in conducting the review is to continue to ensure that the crowdfunding market develops in a sustainable fashion that provides appropriate consumer protections and allows competitive forces to operate in the interests of consumers.
The FCA published its interim feedback on the review in December 2016. The interim results reveal that the current issues with the rules on loan-based and investment-based crowdfunding are:
- inadequate disclosures about risk and loan performs which makes it difficult for investors to assess the risks and returns of investing via a platform;
- financial promotions do not always meet the FCA's requirement to be 'clear, fair and not misleading' due to firms' desire to maintain confidence in platforms;
- firms are testing the boundaries of the regulated crowdfunding perimeter, introducing the risk of arbitrage with investment management or banking activities;
- the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being sufficiently managed; and
- it is often difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings.
In order to address these issues the FCA are considering:
- applying additional rules in the case of more complicated business models;
- setting investment limits to cap potential consumer harm;
- planning further consultations and strengthening the rules on firms' winding-down plans in order to reduce the risks to investors of the plans not operating as expected; and
- introducing more prescriptive rules on the content and timing of disclosures to enhance the quality of communications with potential investors.
However, the UK Crowdfunding Association believes that the issues raised in the FCA's interim feedback report are a question of better enforcement of existing rules by the regulator, as opposed to the creation of new rules. Nonetheless, it is clear this post-implementation review is a welcome opportunity to ensure consumers are adequately protected as the market develops almost three years since the rules were put in place. Notably, the FCA's post implementation review is continuing and the FCA plan to report in mid-2017 with its final conclusions and proposals.
