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Regulator to crack down on crowdfunding amid investor risk concerns

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Written by: Paloma Kubiak
09/12/2016
The financial watchdog is proposing to apply further rules to the growing crowdfunding market as it believes there is evidence of ‘potential investor detriment’.

Crowdfunding is a way people and businesses raise money online to finance or re-finance their activities and crowdfunding platforms act as brokers between those looking to invest and those looking to raise money.

The Financial Conduct Authority (FCA) today outlined proposals to implement further rules in the growing loan-based and investment-based crowdfunding platforms, to update those initially applied in 2014.

It comes as the FCA found the following in both loan-based crowdfunding (where people and institutions lend money to consumers or businesses in the expectation of a return) and investment-based crowdfunding (where people invest in non-readily realisable shares or debt securities issued by businesses):

  • Difficulty for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings.
  • Difficulty for investors to assess the risks and returns of investing on a platform.
  • Financial promotions do not always meet FCA requirements to be ‘clear, fair and not misleading’.
  • Complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.

Separately, in loan-based crowdfunding, the FCA said it was concerned in the following areas:

  • Certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors.
  • The plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity.
  • The FCA has challenged some firms to improve their client money handling standards.

It may also consider setting investment limits to ‘cap potential consumer harm’ and extending mortgage-lending standards to loan-based platforms.

Andrew Bailey, chief executive of the FCA, said: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers. Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”

The proposals for the new rules will be considered in Q1 2017.

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