FCA to investigate UK’s £3.4bn crowdfunding sector
The UK Financial Conduct Authority (FCA) is to investigate the rapidly-expanding crowdfunding sector. The market for such lending in the UK has increased from £1.7bn in 2014 to £3.4bn in 2015. Peer-to-peer companies such as Zopa and Funding Circle link borrowers and lenders, bypassing the need for banks. Investment-based platforms such as Crowdcube enable firms to sell bonds and shares directly to investors. The FCA is proposing higher standards of disclosure in the sector and will take soundings on new regulations to ensure customers are informed of risks and companies are able to manage risks and conflicts of interest correctly. 
 

The City regulator has announced a crackdown on crowdfunding – the fast-growing sector that lets businesses and individuals raise money from online investors.

The Financial Conduct Authority said it had concerns about loan-based businesses – also known as peer-to-peer (P2P) lenders – and investment-based platforms. It said it was examining online alternative finance to take account of the UK market’s rapid growth from £1.7bn of loans, investments and donations in 2014 to £3.2bn last year.

Peer-to-peer operators, including Zopa and Funding Circle, cut out banks by matching borrowers and lenders. Investment-based platforms such as Crowdcube let companies sell shares and bonds to investors who are often enthusiasts for their products. BrewDog, the self-styled punk brewer, has raised £26m from UK beer drinkers using crowdfunding.

The FCA said it was difficult for investors to understand the risks and returns of crowdfunding, marketing material was sometimes unclear and misleading, and some firms did not manage risks and conflicts of interest properly.

It took over regulation of crowdfunding in April 2014 and its proposed changes stem from a review of rules that it announced in July. The government has encouraged the growth of the sector, particularly peer-to-peer lending, as an additional source of capital for new businesses.

Andrew Bailey, the FCA’s chief executive, said rule tightening would be aimed mainly at peer-to-peer lenders because they have changed a great deal in the past year. By introducing provision funds to cover bad debts and attracting institutional investors, peer-to-peer lenders have become more like banks and asset managers but without the regulation that covers those industries, he said.

“We have seen substantial innovation in the loan-based crowdfunding market. What we are trying to do is strike the right balance between enabling innovation and protecting consumers,” Bailey said.

Provision funds may give investors the incorrect belief their money is safe because they are not covered by the government’s deposit protection scheme, the FCA said. Some firms do not have solid plans in place if they fail and the regulator has told some lenders to improve how they handle clients’ money.



Bailey said: “Are they marketed transparently? We’ve seen firms which say: ‘We’ve got a reserve fund and no one has lost money on our platform.’ But there is no guarantee.”

The FCA will next year sound out new rules to address the problems it has found. The regulator has proposed higher standards of disclosure by all crowdfunders and stricter rules on wind-down plans for peer-to-peer lenders.



Christine Farnish, who chairs the P2P Finance Association industry group, said she welcomed the FCA’s review if it used evidence to assess the sector.

“In any dynamic market regulators need to keep the regulatory regime under close review,” she said. “It is not easy for a regulator to grapple with new market entrants, especially when they are disrupting traditional business models and challenging powerful incumbents.”

Zopa was the first peer-to-peer lender when it launched in 2005 to bring consumer lenders and borrowers together. The sector took off as banks withdrew lending during the financial crisis, spawning imitators and new types of business such as Funding Circle, which lets people lend to small businesses.



Bailey said the FCA had received about 375 applications from peer-to-peer lenders of which 17 were fully authorised, 284 were withdrawn and the rest were waiting for full approval. He said the large number of withdrawn applications showed many operators had morphed into other businesses or had not understood the requirements.

The FCA’s action on crowdfunding is the latest in a series of interventions by the regulator since Bailey took over as chief executive in July. It has proposed measures to increase competition between fund managers, tougher regulation of high-cost consumer credit, and a clampdown on the spread-betting industry.

