5 points from FCA’s crowdfunding rulings
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5 points from the FCA’s crowdfunding rule review
In 2014 the UK’s Financial Conduct Authority (FCA) took over the regulation of crowdfunding. The FCA crowdfunding rules were drawn up and it gave itself two years to review those initial rules and determine if they were adequate.
Last week those findings were published following a call for input in July 2016. The feedback from that call has determined that the rules created back in 2014 do indeed need to be tightened.
The main concerns of the FCA has are:
- Protecting investors from being given incorrect information in financial promotions
- Ensuring investment risks are made very clear
- Adequate wind-down measures should an investment platform fold
- The need for more stringent money handling standards
There are five key areas of focus that the FCA have identified, which broadly concentrate on loan based (p2p) and investment based crowdfunding.
Here’s our thoughts on some of the measures the FCA are planning to instigate next year:
1. Clear Communication – this includes how investment opportunities are publicised and how platforms promote their products.
The FCA’s concern here is that investors don’t understand overly complicated and unclear product offerings. It’s highly likely the FCA will bring in more stringent rules on the nature of what platforms can and can’t say in 2017.
We welcome this as we have asked Financial Promotion rule clarifications for this asset class for some time now. Whilst we hope the FCA take a pragmatic approach to this, there’s no harm in being prescriptive on how communications should be done.
2. Investment Caps – in another measure to protect investors from losing all their funds, the FCA may put a cap on how much an individual can invest in a single opportunity.
In our experience, many individual investors don’t take the time to research, consider and compare the loans before they make them. As a consequence, they could end up losing more than they can afford if they pick loans that end up defaulting.
We have always had investment caps in equity. We also extend that to loans individuals can lend into. We think this is a good idea for individual loans. For a diversified pool of loans the limit could be higher, but nevertheless there should be a cap for this asset class.
3. Cross Platform Investment – this applies mainly to p2p platforms where the FCA’s concern is that bad loans on one platform don’t end up on others perpetuating and increasing the risk to more investors. As a consequence the FCA may limit the amount of platforms that can offer the same product or loan.
This is a very valid point being addressed, diversification to reduce risk is paramount. Without exclusivity to a platform it could lead to cross-contamination of risk. But it’s fair to say that this only becomes significant as the industry grows.
At CODE we have always only undertaken exclusive platform raises to ensure that this happens.
4. Wind-up plans – what happens if a platform fails, how are investors protected so that their loan repayments continue?
The FCA’s plans are to strengthen the rules around wind-down plans to ensure firms have sufficient plans to successfully run-off loan books to maturity.
This is VERY important for the sustainability of the loan-based crowdfunding industry. In general this should apply to all intermediaries who are providing services to the underlying lenders or investors.
It’s something we have always ensured – that in the unlikely event of us not being around, there are third parties who will continue to serve our clients without service disruption.
5. Mortgage lending criteria – in an effort to regulate p2p loans, the FCA is proposing the extension of mortgage lending standards to loan-based platforms.
This may actually be more quite to implement and counter-productive to the efficiency and speed that platforms provide.
Certainly, platforms should make sure that credit for individuals should be estimated as accurately as possible. At CODE we always assess detailed credit risk associated with the SME loan, whilst endeavouring to make the application process as efficient and transparent as possible.
But if platforms end up having to mirror the mortgage application process (in itself a long winded time-consuming process), it would be a real shame.
Broadly speaking, the concern of many in the crowdfunding sector is if the proposed rules end up stifling innovation.
Regulation is incredibly important for the protection of both investors and small business owners’ interests. But no-one wants to make it even tougher for SMEs to raise funds in an economic climate such as we find ourselves in now.
A balance needs to be struck that has both parties at the heart of it. We certainly welcome balanced regulation that helps the industry to grow in a healthy and productive manner.
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CODE Investing attended this year’s NACFB Commercial Finance Expo in Birmingham and showcased their latest key product offerings.
The latest BEIS survey evidences the challenges faced by SMEs trying to secure finance from traditional lenders.
The CODE Investing UK Investor report examines the growing trend in lenders supporting loans as a preferred way of financing small businesses.