The Financial Conduct Authority has said it “believes there is evidence of potential investor detriment” from the actions of peer to peer lenders, and says it “intend to publish a Consultation Paper in the first quarter of 2017 proposing new rules” to regulate crowdfunding.
Having investigated and consulted on the changing nature of crowfuding, The FCA today published its interim findings, and voiced its concerned that crowdfunding platforms are making it difficult for investors to understand the risks and returns of investing via the crowd, while marketing material was sometimes unclear and misleading, and some firms did not manage risks and conflicts of interest properly.
Part of the specific concerns centre around the use of provision funds in marketing material. The report states: “Certain features introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors. For example, the use of provision funds may obscure the underlying risk to investors, which may result in investors believing that platforms are providing an implicit guarantee of the loans they facilitate.”
“It is necessary to strengthen investor protection”
Alongside that, the FCA said it was troubled by a number of other aspects of the current
- it is 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
- it is difficult for investors to assess the risks and returns of investing via a platform
- financial promotions do not always meet our requirement to be ‘clear, fair and not misleading’, and
- the complex structures of some firms introduce operational risks and/or con icts of interest that are not being suf ciently managed
Andrew Bailey, the FCA chief executive, 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.”
To that end, the report states that the authority is now currently actively “considering applying additional controls to more complicated business models, or setting investment limits to cap potential consumer harm”
“Issues must be resolved”
The UK Crowdfunding Association has yet to comment, but Adam Tavener, Chairman of Alternative Business Funding (ABF) said “Alternative Business Funding believes that the same levels of investor protection and regulatory oversight should apply across all retail financial services in the UK, irrespective of business model, so the moves by the FCA today to bring equity crowdfunding and peer to peer lending more in line with the mainstream regulated populace are to be welcomed.
Whilst ‘light touch’ supervision was sensible during the very early stages of these industries, the reality is now that collectively the platforms concerned are soliciting billions of pounds in investments from retail investors – so they can no longer be described as in their infancy.
Problems that will need resolving include the frequent conflict of interest that occurs in the equity crowdfunding space and the opacity of product detail that characterises a large number of debt based peer to peer offerings as they continually try to develop features that will increase flexibility and returns to investors in order to compete in the savings market. It is very tempting for them to position their offering as ‘similar to’ a traditional deposit account, especially since investors will focus primarily on headline return and accessibility. These are issues that the industry and regulator can resolve between them, but it is encouraging to see the FCA acting now to forestall industry damaging problems in the future.”