Investments

Do Crowdfunding Investors Need Better Protection?

Crowdfunding watchdogs want to tighten up the rules to protect peer-to-peer lenders and equity investors.

As the value of crowdfunding investments increases with more than 100 platforms completing deals worth £2.7 billion last year, the Financial Conduct Authority wants to check the market is safe for lenders and backers.

Crowdfunding is a way for individuals to invest small amounts into financially supporting individuals, organisations or businesses.

The FCA is concerned that investors do not understand the risks of crowdfunding and is running one consultation split into two parts to gather evidence for reviewing current rules that govern the market.

The first is asking platforms, lenders and borrowers about their experiences and whether any new rules are required.

P2P loans and equity deals under scrutiny

The review looks at P2P lending to businesses and individuals and asks:

  • If the current rules are still appropriate to the fast-growing market
  • If firms should make more disclosures to customers
  • If platforms should identify sophisticated investors from the rest and explain lending risks in more detail

The main risk is that investors cannot call in loans and have to reassign the loan to another investor to exit the transaction or leave their money tied up until the loan has ran its term.

The watchdog is also looking at revising rules for equity crowdfunding, which is when investors take a stake as a shareholder in a company.

The FCA wants to know how conflicts of interest are managed, whether extra due diligence is needed and how to disclose risk warnings within Innovative Finance ISAs.

Will Brexit impact crowdfunding?

FCA director of strategy and competition Christopher Woolard said: “Crowdfunding is an innovative and growing sector and one which we see as part of promoting effective competition.  Rules were introduced in 2014 to ensure consumers were protected without preventing the market from enhancing competition through expansion and innovation.

“Since then the market has grown rapidly and we want to explore concerns that have been expressed about some developments.  Now is the right time to consider whether our requirements remain appropriate and that we have the right rules to support the development of this dynamic market by ensuring consumers are adequately protected.”

The consultation is part of a wider investigation by the FCA into crowdfunding. This investigation will also look at whether Britain pulling out of the European Union will impact on crowdfunding regulation.

The consultation closes on September 8, 2016.

Read the full documentation

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