As the market for both loan-based crowdfunding (peer-to-peer lending) and equity-based crowdfunding continues to grow, the Financial Conduct Authority (FCA) has issued a call for input regarding possible changes to the rules that firms active in this area need to follow.
A call for input is not the same as a consultation paper, in that the regulator does not propose specific new rules. In this call for input paper however, the FCA has outlined plans to impose new requirements in a number of areas. A formal consultation paper may follow at a later date.
As regards peer-to-peer (P2P) lending, the areas on which the FCA wishes to receive ‘input’ include whether:
• The introduction of the P2P ISA has led to more ordinary retail investors becoming active in this area, and whether this carries a risk of clients not understanding the risks involved with the investments
• There are new or emerging risks in the sector that firms’ existing systems and controls might not be able to cope with
• Firms who engage in pooling of investments should be subject to the same requirements as asset managers who operate regulated pooled investment funds
• Additional disclosure requirements should be introduced, such as the need to publish default rates on platform websites
• The rules regarding P2P financial promotions should be tightened or loosened
• P2P firms should need to verify that investors understand the risks involved, similar to the existing requirements for investment-based crowdfunding
For investment-based crowdfunding, the FCA wishes to receive input on whether:
• New rules should be introduced regarding management of conflicts of interest – the FCA notes that firms may have a commercial incentive to make available as many projects as possible to investors, but that offering a large number of projects could mean due diligence is compromised
• The due diligence rules should be strengthened in general
• The client classification requirements are sufficient – at present firms must assess whether a client is high net worth, experienced or sophisticated
• The introduction of Intelligent Finance ISAs gives rise to a need for additional risk warnings to be provided to the client
The call for input closes on September 8 2016.
In the meantime, firms active in the crowdfunding market should note that all applicable FCA rules remain unchanged.
Christopher Woolard, director of strategy and competition at the FCA, said of the exercise:
“The crowdfunding market is an innovative and growing sector and one which we see as part of promoting effective competition. We introduced rules in 2014 to ensure consumers were protected without preventing the market from enhancing competition through expansion and innovation.
“Since then the market has grown rapidly and we want to explore concerns that have been expressed about developments in some aspects of the market. We believe now is the right time to consider whether our requirements remain appropriate and that we have the right rules to support the development of this dynamic market by ensuring consumers are adequately protected.”
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