People who want to invest in small or start-up businesses via crowdfunding platforms will receive clearer information about the business in which they are investing, under proposed new rules published today by the Financial Conduct Authority (FCA).
The changes relate to peer-to-peer lending and equity investment based crowdfunding, the two types of crowdfunding that need regulatory oversight.
Crowdfunding is a way businesses, organisations and individuals can raise money. Generally, it involves a number of people pooling money through a website, often called a platform.
Christopher Woolard, the FCA’s director of policy, risk and research, said: “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.”
Consumers willing to lend money to companies through peer-to-peer crowdfunding websites will receive explanations of the key features of the loans as standard. They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites, or platforms, will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses. A 14 day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. New prudential requirements will also be phased in.
The FCA has also proposed new rules for investment-based crowdfunding, which is already regulated. The paper makes clear the FCA’s belief that these investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses.
The regulator believes its proposals will make the crowdfunding market more accessible, will help foster competition and facilitate access to alternative finance options while also providing additional consumer protection.
There are a number of different crowdfunding business models. Two require FCA regulation: investment-based crowdfunding and loan-based crowdfunding (peer-to-peer lending), of which the latter is a consumer credit activity. The FCA takes over regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014.
The key proposals for loan-based crowdfunding platforms are as follows:
- Information about the platform must be clearly presented and easy to find so customers know with whom they are dealing.
- All communications must be presented in a way that the intended customer will understand. Platforms must not downplay risks or warnings.
- Platforms must have resolution plans in place that mean, in the event of the platform collapsing, loan repayments will continue to be collected so those lending to firms do not lose out.
- Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
- Any promotions (such as print, broadcast or online advertising) must be fair, clear and not misleading. Promotions that are not can be banned by the FCA.
- Where firms do not provide access to a secondary market, investors can cancel without penalty and without reason within 14 calendar days.
- A minimum prudential requirement: either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher. N.B. the fixed minimum will be lower (£20,000) until April 2017, to allow platforms to acclimatise to the new regime
For investment-based crowdfunding platforms, the FCA is tailoring an existing rulebook rather than creating a new one so there are fewer proposed changes. The key proposals are:
- In the retail market, that firms can only promote these platforms to:
o sophisticated investors, high net worth investors, retail clients who receive regulated investment advice or investment management services from an authorised person; or
o retail clients who certify that they will not invest more than 10% of their portfolio (i.e. excluding their primary residence, pensions and life cover) in unlisted shares or unlisted debt securities. This reflects the fact that most investments in start-up businesses result in a 100% loss of investment (between 50% and 70% of new businesses fail in the early years).
- For non-advised clients, firms must assess appropriateness before allowing them to invest through the platform.
- The restrictions the FCA has placed on the marketing of unregulated collective investment schemes, or UCIS, will apply to platforms that offer these investments.
- In addition, while most platforms will simply be providing an introduction to an investment, they will need to think carefully about whether any supporting information they provide (such as a star rating or ‘investment of the week’ award) amounts to advice. If it does, the firm will need to apply to FCA for permission to advise on investments.
Mark Abrahams, director at West One Loans, said: “Therefore an in-depth and considered consultation is welcome. But any new regulation shouldn’t confuse the details. Consumer loans and investments are in another ball park to products designed for sophisticated investors or commercial borrowers. Equally, there’s an ocean of difference between secured and unsecured loans. At West One we’ve already chosen to do business in a regulated way, as currently authorised by the FCA in its rules for UCIS funding. For the industry in general, it’s good news that the next generation of finance is becoming mainstream. So the FCA should be careful not to snuff out the flame of innovation while fighting individual fires.
“There are no magic solutions to cutting out rogue practice – but competition makes innovation more effective than intermediaries.”
