The Financial Conduct Authority (FCA) has published the interim feedback to the call for input to the post-implementation review of the FCA’s crowdfunding rules (FS16/13) (the Interim Feedback Report) summarising the feedback received from the market.
Under the current regulatory framework, firms must seek authorisation from the FCA before they can provide regulated financial services in the UK. They must also meet the threshold conditions set out in the Financial Services and Markets Act 2000 (FSMA). The conditions include having adequate resources and a suitable business model, for example. These requirements apply to all firms that are FCA regulated, including those operating crowdfunding platforms. Once firms are in the market they must continue to meet all relevant regulatory standards.
However, the FCA is not satisfied that all regulated firms are consistently meeting its expectations. The key concerns raised by the FCA regarding loan-based and investment-based crowdfunding are as follows:
- it is difficult for investors to compare crowdfunding platforms or compare with other assets classes due to unclear product offerings;
- it is difficult for investors to assess the risk and returns of investing via a platform;
- financial promotions do not always meet the FCA requirements 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 sufficiently managed.
With particular regard to loan-based crowdfunding:
- certain features 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 failure are inadequate to successfully run-off loan books to maturity;
- some firms are not handling client money to the required standard; and
- the possibility of high-profile platform failure is seen by many firms as the biggest risk to the ongoing viability of the sector.
To address these concerns the FCA is proposing to introduce a number of regulatory tools and possible rule changes. It states in the Interim Feedback Report that it could consider:
- applying additional controls to more complicated business models, or
- setting investment limits to cap potential consumer harm.
Specifically in respect of loan-based crowdfunding the FCA proposes consultation on additional requirements in order to:
- strengthen wind-down rules and consult on additional requirements;
- restrict cross-investment; and
- extend the use of the usual mortgage-lending standards to loan-based crowdfunding platforms.
With respect to loan-based and investment-based crowdfunding the FCA envisages consulting on more prescriptive rules to tackle the concerns about the quality of communications with potential investors, particularly in terms of financial promotions.
The FCA aims to consult in the first quarter 2017 and to publish the final rules this summer.
We consider that this area of financial regulation requires serious attention, particularly in the current uncertain economic climate. The FCA’s Interim Feedback Report has shown that a significant number of market players are concerned that investors are not adequately protected. Whilst the social and commercial good that comes of the increased retail access and participation in business innovation cannot be disputed, the key is to ensure that consumers are aware of the level of risk they are taking, that platforms are accountable for fraud, misrepresentation or improper accounting, and that safeguards are put in place to reduce the risk of platforms failing and leaving unadministrable investments behind them.
For further information please contact Amelia Villiers-Stuart at avilliersstuart@wedlakebell.com.