FCA demands tougher rules for crowdfunding

  1. Financial Conduct Authority
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    The Financial Conduct Authority (FCA) has indicated it wants to clamp down on crowdfunding platforms to enforce tougher standards and protect investors.

    The FCA was appointed as crowdfunding's regulatory body in 2014. The current rules governing the sector were introduced that same year. Now, the FCA has published its interim feedback after soliciting input for the rule review currently taking place.

    The review was always planned as part of the post-implementation process. But, the FCA report notes, there is now an added impetus due to the sector’s explosive growth.

    The report identified some of the weak spots the FCA feels requires action. Namely, the authority lamented the difficulty of comparing “platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings”.

    It is difficult, said the FCA review, for investors to adequately assess the risks and returns of investing on 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 conflicts of interest that are not being managed sufficiently.”

    The FCA aims to apply additional controls to “more complicated business models” and “setting investment limits to cap potential consumer harm”. Further to this, the authority wants to align peer-to-peer lending more closely with its mortgage lending standards.

    Commenting on the proposals, Andrew Bailey, the FCA’s chief executive said the focus is on ensuring that investor protections are appropriate for the risks in the crowdfunding sector “while continuing to promote effective competition in the interests of consumers”.

    Bailey said the FCA will consult next year on new, tougher rules to address the issues identified in the report.

    Reacting to the report, the UK Crowdfunding Association (UKCFA) said it “believes that the issues raised in the FCA’s interim feedback statement are a question of better enforcement of existing rules by the regulator, as opposed to the creation of new rules”.

    “We have long been advocating for clarification of the rules defining loan crowdfunding so look forward to working with the FCA on refining those rules while being mindful of the need to balance the need to promote competition and ensure investor protections are proportionate to the risks.

    “However, we feel the FCA should acknowledge the success of the existing rules in investment crowdfunding both in ensuring investors understand the risks and the way new investors are given additional protections through the appropriateness test and restricted retail investor status compared to traditional models of retail investment.”