The Financial Conduct Authority (FCA) plans to crackdown on crowdfunding platforms and introduce new rules following a review which identified problems with adequate explanation of the risks to investors
The regulator intends to consult on the proposals in the first quarter of 2017. These include more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms.
For loan-based crowdfunding the FCA is also proposing to strengthen the rules on wind-down plans; impose additional requirements or restrictions on cross-platform investment; and extend mortgage-lending standards to loan-based platforms.
Andrew Bailey, chief executive of the FCA, 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. We plan to consult next year on new rules to address the issues we have identified.’
The FCA’s review of the market found a number of concerns about both loan-based and investment-based crowdfunding platforms. It said 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.
Investors find it hard to assess the risks and returns of investing on a platform, while financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’. The regulator says the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.
In the loan-based crowdfunding market in particular the FCA has concerns that certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood.
In addition, the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity, and the FCA has challenged some firms to improve their client money handling standards.
