In 2014 the Financial Conduct Authority (FCA) enacted new rules for the regulation of crowdfunding platforms operated by firms authorized by the FCA. At that time, the agency committed to carrying out a full post-implementation review of the crowdfunding market and regulatory framework in 2016. That process has commenced and will soon identify whether further changes are required for UK crowdfunding industry. As part of the review process, the FCA has published a research document as a point of discussion with industry leaders and other interested parties. Crowdfunding references debt, equity and other securities including peer to peer lending.
Achieving more diverse and accessible financing for individuals and SMEs as well fostering “rigorous competition” for existing retail banking is a stated priority of the UK government. This ambition to foster Fintech innovation is, of course, balanced by the need for consumer protection.
Currently, there are nine platforms that are fully authorized to offer loan-based crowdfunding. The FCA is currently considering 88 applications from additional firms. Some of these platforms have been operating in the market with interim permission. There are 23 FCA-authorized firms and 11 “appointed representatives” operating in the investment based crowdfunding sector. In 2015, during the FCA interim review, there were just 14 authorized firms along with 11 appointed representatives.
Referencing the Cambridge Centre for Alternative Finance (CCAF) report on the UK, the FCA points to the fact that loan-based crowdfunding has grown rapidly in recent years. Investment based crowdfunding has grown dramatically too, but remains relatively small. The FCA also points to the CCAF data that indicates dramatic growth from the real estate sector of internet finance.
The FCA explains they “have potential concerns about some areas of the market and would like to explore them further in this year’s review.” As part of the review, the FCA has posted 22 specific questions for the industry to answer (reproduced below).
Regarding loan-based crowdfunding (P2P), the FCA has asked if there is a regulatory arbitrage with the banking industry without similar consumer protection requirements. The FCA is “open to the possibility that as well as ‘bank-like’ or ‘asset management-like’ types of regulation the developments that may require a bespoke development of regulation.”
As institutional participation has increased, the FCA noted it would be concerned if institutional money received any favorable treatment over retail investors. The agency is also aware that online lending platforms are facing “commercial pressure” to move into near-prime and sub-prime credit.
The FCA expressed concern that P2P financial promotions have cropped up which are not compliant with their financial promotion rules across all types of media citing specifically statements that compare P2P to bank savings accounts.
Regarding investment based crowdfunding, the FCA is keen to review the due diligence process being conducted on platforms. The FCA may consider the feasibility of minimum diligence standards or perhaps a 3rd party assessment of risk. Focusing on transparency, the FCA believes it may be beneficial for platforms to post publicly how many businesses have failed since raising funds and how many have successfully generated “pay-outs.” When an offer is listed the FCA states that perhaps only money raised on the platform may be presented as to not cloud the source of funds.
The FCA document is a thoughtful presentation of questions that need to be answered by industry incumbents. The deadline for feedback is September 8, 2016.
FCA Questions on Crowdfunding
Q1: Do you consider that there is the potential for regulatory arbitrage with banking business? If so, what measures should be considered to address it?
Q2: Do you have any concerns about, or evidence of, differences in the treatment between retail and institutional investors?
Q3: Have you seen any initial evidence that the ISA wrapper has led to consumers not fully appreciating the risks involved in Innovative Finance ISA investments?
Q4: Are there differences in borrower protection between commercial and non-commercial agreements that would be best addressed by applying additional rules to P2P platforms, or are the existing rules adequate?
Q5: Do you agree with our analysis of the key developments in the loan-based crowdfunding sector over the last two years?
Q6: Are you aware of current or emerging risks that firms current infrastructure, systems, and controls might not be adequate to deal with?
Q7: Do you have any comments on our concerns over the development of new loan-based crowdfunding business models? Have there been other specific developments that are relevant to the high-level standards summarized above?
Q8: Do you have any comments on the standards of disclosure on loan-based crowdfunding platforms?
Q9: Are our current financial promotion rules for loan-based crowdfunding promotions proportionate? If not, can you please provide examples?
Q10: Is our approach to online and social media promotions proportionate? Do you have any suggestions as to how to improve our rules or approach on promotions?
Q11: Should we require loan-based crowdfunding platforms to assess investor knowledge or experience of the risks involved? What would a proportionate requirement look like?
Q12: What effect do you think loan-based crowdfunding has had on competition in lending and investment/savings markets?
Q13: Where do you think regulations could be amended
to increase confidence in loan-based crowdfunding markets, encourage the development of the markets in the interest of consumers or increase competition by removing uneven playing fields?
Q14: Do you have any comments on the resolution plans of firms operating loan-based crowdfunding platforms?
Q15: Are there any other matters we should take into account in the post-implementation review of loan-based crowdfunding?
Q16: What other market developments should we take into account in our review of the investment-based crowdfunding sector?
Q17: Do you have any comments on the management of conflicts of interest on investment-based crowdfunding platforms?
Q18: Do you have any comments on current due diligence standards for investment-based crowdfunding platforms?
Q19: What do you think of the current client assessment standards on investment-based crowdfunding platforms?
Q20: What do you think of the current standards of information disclosure on investment-based crowdfunding platforms?
Q21: Should we mandate the disclosure of risk warnings in relation to non-readily realizable securities held within Innovative Finance ISAs?
Q22: Are there any other matters we should take into account in the post-implementation review for investment-based crowdfunding?