The Financial Conduct Authority (FCA) has issued interim feedback on its September 2016 call for input into the crowdfunding sector. The tone and content of the feedback suggests that firms operating in this sector could soon be subject to much stricter regulatory requirements.

The FCA has still not formally proposed new rules for the crowdfunding sector – that may come sometime in 2017, when the regulator is expected to issue a formal consultation paper – but it is already strongly suggesting that major changes lie ahead. For example, the FCA press release suggests that loan-based crowdfunding firms (peer-to-peer lending firms) could be subject to similar lending standards to those that currently apply in the mortgage sector.

The FCA has concerns over loan-based crowdfunding firms’ activities in areas such as:

• The way they represent the risks associated with the transaction to their clients
• Their plans for a wind-down in the event of business failure – according to a 2015 study by AltFi Data and law firm Nabarro, one in five crowdfunding firms ultimately fail
• Their handling of client money

The following are all areas where the regulator has concerns relating to both loan-based and investment-based crowdfunding firms:

• How easily investors can compare different crowdfunding platforms, and how they can compare crowdfunding with other asset classes
• Whether investors can properly assess the risks and returns associated with crowdfunding
• Whether their financial promotions meet the requirement to be ‘clear, fair and not misleading’ – once again the FCA’s feedback has highlighted firms who are still describing a crowdfunding investment as being akin to a savings product
• Their risk management strategies and handling of conflicts of interest

Whether investors are aware of the risks of entering into a crowdfunding transaction appears to be of particular concern to the FCA. The feedback statement refers to “inadequate disclosures about risk and loan performance” by loan-based crowdfuding firms; and “inadequate disclosures … and the downplaying of risk” by investment-based crowdfunding firms.

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.”

For now, crowdfunding firms need to ensure that they fully comply with the FCA’s existing rules. They also need to keep a close eye on any announcements regarding possible new rules in this area. The crowdfunding sector has grown massively in recent years and it appears that the FCA has responded to this by proposing greater levels of investor protection.

As well as a requirement for loan-based crowdfunding firms to abide by the lending standards that apply to mortgage firms, other new requirements that might be proposed include:

• Forcing firms that pool investment risk to follow rules similar to those that currently apply to asset managers
• Imposing more stringent capital adequacy requirements
• Requiring loan-based crowdfunding firms to assess investor understanding, similar to the existing requirement for investment-based crowdfunding

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.