FCA regulation won't kill crowdfunding

The City watchdog has outlined its intention to avoid harming the crowdfunding industry when it publishes draft proposals to regulate the industry in a fortnight.

Speaking at a UKCFA industry conference in London last week, David Geale, Head of Saving, Investment and Distribution Policy at the FCA, said: “It is not our intention to kill crowdfunding, let’s draw a line under that.”

There have been fears over the FCA’s plans to regulate the booming sector, which allows a “crowd” of investors to buy equity stakes or lend to businesses in need of funds, would stifle growth or even choke off the industry altogether.

A particular concern has been whether regulation would restrict crowdfunding to high net worth or sophisticated investors only, which would effectively remove the aspect within the “crowd” platforms.

What is becoming clear is a split in how the regulator views crowdfunding and peer-to-peer (P2P) lending.

Investment-based crowdfunders, including debt, equity and P2P lending platforms will require authorisation from April 2014.

Those which won’t require authorisation, at present, are rewards-based and donation-based platforms. This also applies to industrial and provident societies.

Key risks in the sector identified by the FCA:
-    Loss of capital;
-    Share dilution;
-    Illiquidity; and
-    Fraud.

Nick Moules, Marketing and Communications Manager at rebuildingsociety.com, told B&C: “Secondary market regulation is to be taken away by the FCA. It’s now an integral aspect of their job and cited by P2P platforms as integral to their business model.

“Capital requirements for platforms will also be part of the consultation process. There was no indication that there needs to be a minimum £2,000 to be required to be a lender / investor in P2P space, but likely in crowdfunding, at least initially as that is how currently authorised have been operating. This is controversial and a key aspect to lobbying work – people are worried that it takes the crowd out of crowdfunding.

“The FCA needs to understand the customer journey when authorising a platform. It needs to look at whether risks are being made clear, are fair and not misleading; creating good codes of conduct similar with other products in financial services.”

The Regulator will also be looking at the level of due diligence performed by platforms on companies that borrow when deciding whether to authorise these platforms.

David Blair, Head of Financial Regulation at law firm Osborne Clarke, said: “There is a danger that the crowd could fall out of crowdfunding. ‘Sophisticated investor’ funding is not quite what captured the public imagination.”

Crowdfunding has emerged as a promising alternative to bank finance for businesses looking for funding but is also allowing ordinary investors to invest in opportunities.

It also emerged that HM Treasury is in talks with the industry about allowing investors to hold crowdfunded investments in ISA wrappers so that gains can be made tax-free.

Kate McCarthy, representing the government department, said: “We want to help UK crowdfunding grow and maintain the UK’s position as a leader in the sector.”

Julia Groves, Chair of the UKCFA, said: “Regulation could be the single biggest catalyst for the industry’s growth, or the biggest obstacle if it becomes too expensive and time consuming for platforms to become authorised. Restrictions placed on self-directed investors means that the majority of people who could benefit from crowdfunding could find they are excluded, leaving accessibility to these investments as it is now – for wealthy people and big institutions only. The clue is in the name.

“Crowdfunding is a solution for the 95 per cent that don’t have access to finance and investment opportunities and not the 5 per cent who have. Where people understand the risks they are taking, they should not be prevented from doing so, and certainly not on the basis of how much money they own or earn. Wealth is not a skill set.”

Nick added: “My personal view is that P2P will carry on in a similar way to now alongside capital adequacy requirements and a code of conduct that places the consumer at the heart of it.

“Crowdfunding faces arguably a tougher road and more objections to how it wants to operate. Everyone acknowledges that it is high risk, so protecting unsuitable consumers without compromising the accessibility for all is a tough one for all concerned.”

The FCA’s draft consultation is due to be published mid-October, before final implementation on April 1 2014, which is when regulation under the OFT transfers over to the FCA.

All applications need to be authorised by April 2016, which is when full authorisation comes in.