UK financial watchdog cracks down on crowdfunding

UK financial watchdog cracks down on crowdfunding
Britain’s Financial Conduct Authority is keen to have a clearer boundary between crowdfunding and asset management. (Reuters)
Updated 10 December 2016

UK financial watchdog cracks down on crowdfunding

UK financial watchdog cracks down on crowdfunding

LONDON: Crowdfunding platforms that offer home loans should be regulated like mortgage lenders to improve safety and transparency for customers, Britain’s Financial Conduct Authority said.
Crowdfunding or “peer-to-peer” (P2P) operators collect small sums of money from many people online to lend to companies or individuals, or invest in bonds. The size of the market in Britain stood at 2.7 billion pounds ($3.40 billion) last year, up from 500 million pounds in 2013.
The watchdog’s recommendation was included in the results of a public consultation into rules it introduced in 2014, which it said needed tightening up because the market was changing rapidly.
“We plan to consult on additional rules in a number of areas,” the watchdog said.
“These include more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms.”
Firms like Funding Circle, Zopa and Seedrs cut out banks by bringing together lenders and borrowers, or channelling investment into start-ups.
FCA CEO Andrew Bailey said not all platforms were being clear to customers about how they worked, with some “potentially misleading” in the way they presented their investment strategy or the role of reserve funds or provisions for loan defaults.
“It would be wrong to give investors the idea they would never lose money as a consequence of having a reserve fund,” said Bailey.
A core aim of new rules would be to have a clearer boundary between crowdfunding and asset management, he said.
The UK Crowdfunding Association, with many members from the investment side of the sector, said issues raised by the FCA highlighted the need for better enforcement of existing rules rather than new ones.
The watchdog is assessing applications for full authorizations from numerous platforms, a process that has thrown up many of the concerns it has identified.
To date, it has received 377 applications for licenses, with 16 platforms fully authorized, and of the 77 still being assessed, 36 have an interim license. Over 280 applications have been withdrawn.
“They got the wrong idea of what this is all about,” Bailey said.
Some in the sector have criticized the watchdog for being slow in authorizing firms, but Bailey said business models were continually changing, making it more time-consuming for the regulator to vet applications.
Christine Farnish, chair of P2PFA, an industry body, said it was not easy for a regulator to grapple with new market entrants when they are disrupting traditional business models.
“We trust that the critical consumer outcomes test — based on a balanced and evidence-based assessment of benefits and risks — will be applied as the review moves forward,” Farnish said.
The regulator said it would consult next year on additional rules to strengthen “wind-down” plans, additional requirements or restrictions on “cross-platform” investment, and extending mortgage-lending conduct standards to loan-based platforms that offer home loans.
The watchdog’s review found that in both loan and investment crowdfunding it was hard for investors to compare platforms, or compare crowdfunding with other asset classes.
Financial promotions were not always clear, fair and not misleading, and the “complex structures” of some firms created operational risks.
“It is difficult for investors to assess the risks and returns of investing on a platform,” it said.
The watchdog said it has “challenged” some firms to improve standards in handling customer money.