The Financial Conduct Authority (FCA) has published the interim
feedback to the call for input to the post-implementation review of
the FCA's crowdfunding rules (FS16/13) (the Interim Feedback
Report) summarising the feedback received from the market.
Under the current regulatory framework, firms must seek
authorisation from the FCA before they can provide regulated
financial services in the UK. They must also meet the threshold
conditions set out in the Financial Services and Markets Act 2000
(FSMA). The conditions include having adequate
resources and a suitable business model, for example. These
requirements apply to all firms that are FCA regulated, including
those operating crowdfunding platforms. Once firms are in the
market they must continue to meet all relevant regulatory
However, the FCA is not satisfied that all regulated firms are
consistently meeting its expectations. The key concerns
raised by the FCA regarding loan-based and investment-based
crowdfunding are as follows:
it is difficult for investors to compare crowdfunding platforms
or compare with other assets classes due to unclear product
it is difficult for investors to assess the risk and returns of
investing via a platform;
financial promotions do not always meet the FCA requirements to
be 'clear, fair and not misleading'; and
the complex structures of some firms introduce operational
risks and/or conflicts of interest that are not being sufficiently
With particular regard to loan-based crowdfunding:
certain features introduce risks to investors that are not
adequately disclosed and may not be sufficiently understood by
the plans some firms have for wind down in the event of failure
are inadequate to successfully run-off loan books to maturity;
some firms are not handling client money to the required
the possibility of high-profile platform failure is seen by
many firms as the biggest risk to the ongoing viability of the
To address these concerns the FCA is proposing to introduce a
number of regulatory tools and possible rule changes. It states in
the Interim Feedback Report that it could consider:
applying additional controls to more complicated business
setting investment limits to cap potential consumer harm.
Specifically in respect of loan-based crowdfunding the FCA
proposes consultation on additional requirements in order to:
strengthen wind-down rules and consult on additional
restrict cross-investment; and
extend the use of the usual mortgage-lending standards to
loan-based crowdfunding platforms.
With respect to loan-based and investment-based crowdfunding the
FCA envisages consulting on more prescriptive rules to tackle the
concerns about the quality of communications with potential
investors, particularly in terms of financial promotions.
The FCA aims to consult in the first quarter 2017 and to publish
the final rules this summer.
We consider that this area of financial regulation requires
serious attention, particularly in the current uncertain economic
climate. The FCA's Interim Feedback Report has shown that
a significant number of market players are concerned that investors
are not adequately protected. Whilst the social and commercial good
that comes of the increased retail access and participation in
business innovation cannot be disputed, the key is to ensure that
consumers are aware of the level of risk they are taking, that
platforms are accountable for fraud, misrepresentation or improper
accounting, and that safeguards are put in place to reduce the risk
of platforms failing and leaving unadministrable investments behind
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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