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City regulator unveils plans to regulate crowdfunding

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The Financial Conduct Authority (FCA) has proposed new rules for regulating the crowdfunding and peer-to-peer lending industry.

Under the proposals, consumers 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.

Crowdfunding is a way for small business, organisations and individuals to raise capital in order to grow. Typically, it involves a number of people pooling money through a website, often called a platform. This type of lending is also called peer-to-peer lending.

The watchdog said investors 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 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.

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.”

The crowdfunding market is currently worth about £360m in the UK, with 90% of crowdfunding currently conducted through peer-to-peer platforms.

The FCA has also proposed new rules for investment-based crowdfunding, which is already regulated.

It said the proposals will make the crowdfunding market more accessible, help foster competition and facilitate access to alternative finance options while also providing additional consumer protection.

Goncalo de Vasconcelos, founder of the equity-based crowdfunding platform, SyndicateRoom, said: “While we welcome a consultation that’s aimed at ensuring transparency and consumer protection, it’s important that over-regulation isn’t allowed to kick the crowd out of crowdfunding.

“The crowdfunding sector is growing fast, and it’s both understandable and encouraging that the FCA is taking an interest. But it shouldn’t choke off such an exciting new form of investment with heavy-handed regulation. 

“Clearly there are risks involved with crowdfunding and it is much riskier than placing money on deposit.

“It’s absolutely vital that these risks are clearly outlined to anyone who invests, or lends, their money via a crowdfunding platform.

“As with many investments, there is a risk that consumers could lose all the money they invest through a crowdfunding platform.

“For most people, crowdfunding will be a satellite in their portfolio, rather than a core. Investment-based crowdfunding platforms like our own are high risk and for most people will only generally constitute a small holding in their portfolio.

“It’s also important that consumers understand that the platform they are investing through is stable and the FCA’s focus on minimum prudential requirements clearly addresses this fact.”

The FCA will take over regulation of consumer credit from the Office of Fair Trading next April.

There are a number of different types of crowdfunding, some of which require regulation and some that do not. These are set out below. Only the first two are regulated activities. 

o Loan-based (i.e. peer-to-peer lending): lending money to individuals or businesses in the hope of a financial return, such as interest payments
o Investment-based: investing directly or indirectly in new or existing businesses by buying shares or debt securities, or units in an unregulated collective investment scheme.
o Donation-based: gifting money to enterprises or organisations people want to support.
o Reward-based: for example, supporting a band and receiving their new CD in return.
o Exempt activities: investing or lending money using organisations that do need to be authorised or investments that do not need to be regulated.

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