The Financial Conduct Authority (FCA) has tabled tougher regulation for the increasingly popular crowdfunding industry.
Crowdfunding allows individuals to lend to small businesses or buy shares in unlisted companies. The industry has grown rapidly as banks began restricting the amount they lent and became more risk averse.
The regulation outlined by the FCA aims to improve consumer protection standards.
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, balance by a desire to ensure firms and individuals continue to have access to this innovative source of funding.”
The regulator proposes that loan-based crowdfunding platforms will have to ensure that information is displayed clearly for customers and not downplay potential risks. Any advertisements and promotions must also be fair, clear and not misleading. Promotions that aren’t could be banned by the FCA.
For investment-based crowdfunding platforms, the FCA wants platforms to only promote to sophisticated investors, high net-worth investors, professionally advised clients or clients who certify they will not invest more than 10% of their portfolio in unlisted shares or unlisted debt securities.
These restrictions reflect the fact that most investments in start-up businesses result in a 100% loss of investment. Typically between 50% and 70% of new businesses fail in their early years, the watchdog explained.
The UK Crowdfunding Association (UKCFA) descried the consultation paper as “largely positive”. It added that it ensures the highest standards are applied across the industry. A minimum prudential of either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher – is also being considered.
The organisation also said the paper achieves a “reasonable balance between consumer protection and access to finance and investment opportunities”.
Trillion Fund, a crowdfunding site that specialises in clean energy infrastructure, said it was “delighted” to see high standards consistently applied across the industry.
Julia Groves, managing director of both Trillion Fund and the UKCFA, said, “Our only concern is that there is insufficient differentiation between loan and equity based crowdfunding – both now require an appropriateness test and the blacker 10% cap (unless advised) does not recognise that long-term debt investment in operational solar farms for example may have a very different risk profile to an equity investment in a technology start up.”