Treasury committee publishes exchange of letters regarding crowdfunding regulation

Parliament’s Treasury Select Committee has published an exchange of letters between its chairman, Andrew Tyrie MP, and the individuals who at the time were the chief executives of the two main financial regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

On June 1 Mr Tyrie wrote to acting FCA chief executive Tracey McDermott and PRA head Andrew Bailey, and sent copies of the letter to the Chancellor of the Exchequer, George Osborne MP.

In his letter to Ms McDermott, he asked:

1. Who was responsible for ensuring that accurate information was provided to crowdfunding investors?
2. Were incentives in place for firms operating crowdfunding platforms to fully assess the creditworthiness of borrowers and investors?
3. To what extent did the FCA believe consumers understood the risks associated with crowdfunding?
4. What impact has the growth of crowdfunding had on competition?

In the letter to Mr Bailey, he asked:

1. To what extent did the PRA believe the crowdfunding sector could withstand economic shocks?
2. What impacts existed as a result of the financial sector’s increased exposure to unsecured loans through crowdfunding platforms?

In response to each question, Ms McDermott replied as follows:

1. FCA rules require firms to provide information that is ‘clear, fair and not misleading’. Crowdfunding customers must be informed of the nature and risks of their investment. Since October 2014 the FCA has reviewed 27 peer-to-peer lending (loan-based crowdfunding) financial promotions, and has requested that 12 of these were amended or withdrawn. The FCA also asked for amendments or withdrawals for nine of the 10 cases of investment-based crowdfunding promotions it reviewed.
2. P2P firms have commercial incentives to lend to creditworthy borrowers. If the borrower is an individual, or a small business, the P2P firm has to comply with creditworthiness rules which are equivalent to those applying to firms that actually provide credit themselves.
3. Under FCA rules, investment-based crowdfunding firms are required to assess the level of knowledge, experience and understanding of the investor, even for non-advised sales. In the case of P2P, the FCA says it has evidence of a high level of understanding of the risks amongst investors, and that further research will be carried out to assess this in the future.
4. The crowdfunding sector remains relatively small at present, but if it continues to grow, increased competition should be expected.

In his reply, Mr Bailey commented that the PRA is not responsible for prudential regulation of crowdfunding firms. He did however comment on the importance of crowdfunding customers understanding the risks involved, and that they would not have access to the Financial Services Compensation Scheme in the event of a firm failing. He summarised his organisation’s position by saying that “the crowdfunding sector is currently too small to be systemically important to the UK financial system”, but added that “[The Bank of England] will continue to monitor growth in the sector and any prudential risk it may pose to the firms it supervises and to the financial system more broadly.”

Since this exchange of letters, Mr Bailey has left the PRA to become the permanent chief executive of the FCA, while Ms McDermott has left the FCA. Mr Osborne is also of course no longer the Chancellor.

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.