FCA’s revised approach to regulating the UK crowdfunding industry

The FCA has published its long-awaited follow-up to its 2016 review of the regulatory regime for crowdfunding. It has decided not to change the regime for investment-based crowdfunding platforms. But it has suggested new rules which would impact peer-to-peer lending.

What has the FCA suggested for P2P lenders?

Under the FCA’s proposals, loan-based crowdfunding platforms would need to do the following:

  • disclose clear and accurate information about potential investments and the risks involved
  • ensure investors are adequately remunerated for the risk they are taking
  • clarify the systems they have in place e.g. for assessing the risk, value and price of loans
  • improve their governance e.g. relating to a potential winding-down of the platform
  • adhere to marketing restrictions which currently only apply to investment-based crowdfunding platforms.

According to the FCA, these changes are intended to address poor practice and ensure the protection of investors and keep up with ever-changing business models.

1. Poor practice and investor protection

Most of the poor practice seen by the FCA in its review related to poor communication and marketing materials. Examples included platforms:

  • using opaque fee structures
  • failing to include suitable risk warnings
  • advertising maximum rates of return in a way that might lead investors to assume that such rate was fixed
  • creating false perceptions about an investor’s ability to exit.

The new disclosure requirements and marketing restrictions for P2P platforms are intended to tackle some of these.

Other examples of poor practice identified by the FCA related to inadequate risk management, record-keeping and wind-down arrangements. In response, P2P platforms may be required to have independent compliance, risk and audit functions, maintain a resolution manual and meet additional prudential requirements.

2. Reflect breadth of business models

The FCA found that there is now a diverse range of business models in the crowdfunding sector. Some platforms merely act as a conduit, connecting investors to investment opportunities that are then administered by the platform.

Other platforms (more commonly found in the P2P sector) provide more discretionary services e.g. pricing investments or selecting the investor’s portfolio of loans. Platforms may also offer additional services e.g. acting as the investor’s nominee or security agent.

The FCA’s paper explores the types of harm which might arise from these different business models. Its proposed rules are intended to be proportionate to the scale and complexity of the business. Complex platforms will be expected to choose to either enhance their controls or simplify their business model.

What’s the impact on investment-based crowdfunding platforms?
The existing regime for investment-based crowdfunding platforms is relatively prescriptive. For example, they are already subject to marketing restrictions.

The FCA’s review identified fewer causes of concern about that part of the crowdfunding industry and so the proposed new rules focus on P2P platforms. However, the paper does include guidance to help investment-based crowdfunding platforms comply with their regime.

What happens next?
The consultation closes on 27 October 2018 and the FCA aims to publish final rules in Q2 2019. The FCA has separately published final changes to its rules on creditworthiness assessments in consumer credit which would also impact P2P agreements.

Separately, the EU Parliament is due to consider proposals for a EU Crowdfunding Regulation. See our post on the Commission’s Fintech Action Plan for more.

Written by Abi Smith, Trainee Solicitor, Financial Regulation Group.