The UK crowdfunding industry is worried that a recent “Call for Input: The Consumer Investments Market” by the UK Financial Conduct Authority (FCA) may undermine the viability of the investment crowdfunding industry. Comments on the process closed on December 15, 2020.
The consultation was instituted because the FCA believes “there are some areas where we think it is not working as well as it should and where change is needed.” The FCA notes the need to balance freedom of choice with investor protection while fostering innovation and competition.
“We will use the responses to this Call for Input in putting forward a regulatory framework that enables us to realise our ambition in the Consumer Investments market.”
The UK is home to the most robust crowdfunding industry in the world. This is inclusive of early-stage investing, real estate, and debt-based platforms. Widely admired, and at times copied, the UK has harbored light-touch rules crafted by a regulator that, in the past, has maintained a relatively close relationship with regulated platforms.
Crowdfunding platforms can provide access to private securities previously unattainable to smaller investors. These securities can generate heightened returns but also involve a high level of risk and loss. P2p platforms have pitched their offerings as providing an alternative to holding cash in low-interest rate (or negative real rate) accounts – enabling investors an opportunity to generate more income. But some problematic securities and platform failures have worried policymakers.
Mini-bonds, once utilized by issuers on several platforms, had promotions permanently banned for retail investors as of January 1, 2021. Only sophisticated investors or high net worth individuals may receive marketing information regarding mini-bonds and these promotions must include a notice that investors risk losing all of their money. These new rules apply to investment-based crowdfunding platforms and other intermediaries offering or otherwise providing services in relation to “speculative illiquid securities.”
Last month, the FCA announced that Directors of MoneyThing Capital Limited, a regulated peer-to-peer lending firm, placed the company into administration. The decision was made after an extended wind-down process that began in 2019.
According to a post on MoneyThing’s website, the action was taken in “order to protect the interests of the Companies’ creditors as a whole.”
“We have taken into account the tougher trading conditions experienced in 2020 as well as litigation by a MoneyThing borrower.”
Administrators will be sorting out claims from creditors and investors, as well as borrowers, for some time.
There have been several other failures in the P2P lending sector like the ill-fated Lendy that included allegations of pilfered money.
But worries persist that potential new rules will impair securities crowdfunding offerings of both debt and equity and whether, or not, a few bad apples will spoil it for the rest.
“It is both disappointing and concerning that there is no mention of the 10 years of work done to develop the regime for non-readily realisable securities. The FCA’s own review showed that those rules have been effective and have provided a new middle ground for retail investors with the right balance of protections.”
Davis also operates Abundance Investments a peer-to-peer lender that operates in the renewables and impact investing sector.
The concern is that retail investors may see access to securities issued via online investment platforms diminished or, perhaps, new rules could impact the industry to such a degree that it imperils the entire industry.
Some industry insiders believe that earlier changes to the regulatory environment undermined the entire P2P lending sector. Several P2P platforms have exited the retail sector or adjusted offerings to reduce risk or simply decided to focus only on institutional money.
While periodic adjustments to investment crowdfunding rules may be anticipated, the FCA should incorporate updates that do not undermine innovation – in an industry that continues to iterate and adapt. The UK is the world’s leading Fintech hub, an accomplishment that has been achieved by combining risk-taking entrepreneurs and investors that support them, with policymakers that embrace the economic benefit of a market that encourages innovation.