Crowdfunding and P2P sectors continue to grow.
The crowdfunding and P2P sectors have experienced significant growth in recent months and years. The sectors involve one of two types of activity.
Loan-based crowdfunding and peer-to-peer (P2P) lending involves firms acting as intermediaries between wannabe borrowers and individuals wishing to lend. Individual lenders are attracted by the chance to earn returns that outstrip those available on savings accounts, while borrowers are attracted by the chance to borrow at lower rates than might be available on bank loans.
Investment-based crowdfunding involves individuals purchasing shares, debentures or other assets in firms (usually newly established ones), thus allowing the firm to raise additional capital.
Trade association the Peer to Peer Finance Association (P2PFA) announced that P2P lending at the end of the first quarter of 2014 was £1,207 billion, compared to £491 million at the end of the same period in 2013.
A report by the Universities of Berkeley and Cambridge estimated that investment-based crowdfunding firms raised 618% more in 2013 than in 2012.
Investment bank Goldman Sachs and retail and investment bank Société Générale are amongst the well known names that have indicated they may enter the sector.
It is the use of P2P lending as an alternative to a savings account which has particularly aroused the interest of the regulator, the Financial Conduct Authority (FCA). It is concerned that some P2P firms are marketing their offering as a risk-free way of saving, and are sometimes even using the words ‘savings’ and ‘savers’ in their marketing communications. Lending via a P2P platform is in fact far from risk free, as the borrower could default on their repayments, and customers in this market sector do not have access to the Financial Services Compensation Scheme in the event of financial loss. Some P2P platforms have implemented alternative protection arrangements, and new FCA rules introduced late last year have sought to increase the protection for customers in the event of firm failure.
Investment-based crowdfunding can also be a risky activity. Investors aren’t always aware that most start-up firms fail, and that if this occurs they could ose their entire investment.
P2P lending became regulated by the FCA on April 1 2014, at the same time as the FCA assumed responsibility for all areas of consumer credit. In many cases, the P2P firm is required under FCA rules to carry out the same duties a lender would, even though the firm does not actually lend money. For example, P2P firms have a responsibility to carry out creditworthiness assessments, and provide certain pre-contractual information.
The FCA already regulated investment crowdfunding prior to 2014. Firms in this sector need to ensure that all customers are either sophisticated or high net worth investors, or else that customers undertake not to invest more than 10% of their capital in a crowdfunding scheme. Firms must take the utmost care to ensure all customers fully understand the risks involved.
With most crowdfunding firms conducting their business via online platforms. The FCA places significant emphasis on the firms’ IT security arrangements.
If you’re thinking of entering the P2P or Crowdfunding sectors speak to one of the team at Scott Robert on 0161 914 5727 for advice regarding how to ensure you meet the FCA’s requirements. We can also offer a complete out of the box solution to delivering your P2P or crowdfunding platform.
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.