Crowdfunding for investors putting small sums of cash in to risky business start-ups is likely to be policed by financial regulators under new rules.
The government believes that the lack of regulation has held back investors from putting cash in to a business wanting to grow.
Now, the British government has announced that the industry will come under the auspices of the new Financial Conduct Authority (FCA).
The FCA is planning to consult with peer-to-peer lending outfits such as Funding Circle and Zopa next year on how the new rules will work before the watchdog becomes effective in April 2014.
The Peer-to-Peer Association said: “We are committed to working with the FCA and the government to help build the right framework for our industry.
Peer-to-peer lending matchmakers
“That’s because we have always believed that introducing regulation that was proportionate would help our industry flourish.”
The issue has come about because of potential misgivings from investors who were unwilling to help finance a project through arrangements that are not independently regulated.
Crowdfunders currently require a license from the Office of Fair Trading (OFT), which regulates consumer credit providers, to provide ‘debt administration’ activities.
But they don’t require a license to ‘lend’ because that isn’t what they do – they don’t lend their own money and simply match-up potential lenders and borrowers. Many of the investments are small amounts pooled together to finance film or media projects.
Peer-to-peer lending is also popular for technology start-ups who cannot raise cash from banks as they have a lack of trading history.
Protection for crowdfunding investors
Tony Anderson, of lawyers Pinsent Masons, explained potential issues have arisen over how tougher regulation would fit with the reforms planned for the financial services industry.
“It’s a positive thing that a sector of the finance industry is calling for the introduction of regulation to help govern it but there is an issue with overlapping regulatory agendas at national and European Union level for banking and shadow banking,” he said.
A Treasury spokesman said: “We are keen to promote innovation in financial services and want to support new entrants to the market, such as peer-to-peer lenders.
“It’s very important that consumer credit providers are properly regulated which is why the regulation of peer-to-peer platforms will be transferred to the new Financial Conduct Authority.”
The change is part of the Financial Services Bill, which is currently before Parliament and has been amended to cover peer-to-peer lending.
Crowdfunding is not just popular in the UK – globally more than £967 million was raised from projects last year.