Crowdfunding has rapidly been adopted by start-ups in the hospitality industry as a genuine source of funding, but there have been concerns that – especially with current low interest rates – investors could make ill-advised decisions, without understanding the risk to their money.
Now, however, people looking to lend money or invest through crowdfunding will be better protected under new rules confirmed by the Financial Conduct Authority (FCA).
By boosting consumer protection, the rules will help ensure that consumers have access to fair, clear information that is not misleading, when using loan-based, or securities-based crowdfunding platforms.
Consumer protection but continued access to crowdfunding for businesses
Christopher Woolard, director of policy, risk and research at the FCA, said:
“We want to ensure that consumers are appropriately protected – but not prevented from investing.
“We have been careful to listen to feedback from the market and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding.”
Rapid growth
The crowdfunding market is small but growing rapidly. Securities-based crowdfunding, which the FCA already regulates, allows people to buy shares or debt securities in a company. Last year £28m was raised for growing businesses, an increase of around 600 per cent compared to 2012.
Loan-based crowdfunding (mainly peer-to-peer (P2P) lending), which will be regulated by the FCA from April 2014, saw £480m lent by consumers to individuals and businesses in 2013, a rise of around 150 per cent on the previous year.
The FCA consulted on its proposed rules in October 2013, with the majority of feedback positive and supporting the FCA’s consumer-oriented approach.
More detail on the FCA’s rules on loan-based crowdfunding
The rules on loan-based crowdfunding focus on ensuring that consumers interested in lending to individuals or businesses have access to clear information, which allows them to assess the risk and to understand who will ultimately borrow the money.
The rules also require firms running the loan-based platforms to have plans in place so that loan repayments continue to be collected even if the online platform gets into difficulties. Also, new prudential regulations will be introduced over time so that these firms have capital to help withstand financial shocks. This is important as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme.
More detail on the FCA’s rules on security-based crowdfunding
Consumer protection is at the fore of the FCA’s approach to security-based crowdfunding, whilst ensuring that those wishing to invest can do so, and small and growing business still have access to this form of funding.
The new rules for securities-based crowdfunding keep the crowd in crowdfunding by allowing anyone to invest up to 10 per cent of their available assets; while those who take advice or have the relevant knowledge and experience can invest more.
The security-based crowdfunding rules also apply to equity and debt securities such as mini-bonds, which are difficult to cash in.
The new rules will provide the same level of protection to investors whether they engage with firms online, or offline as a result of the direct marketing or telephone selling.
More information
1. The Policy Statement on The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media.
2. The Consultation paper on the FCA’s regulatory approach to crowdfunding (October 2013.)
3. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
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