First up, I’m going to do something rare among the commentariat: I’m going to ‘fess up’ to a mistake.
Last week in my column on the Financial Conduct Authority’s crowdfunding proposals, I stated its proposal that all retail clients not classified as either sophisticated or high net worth should be advised would be disproportionate.
And of course it would: crowdfunding investments typically start as low as £5 or £10; a great many are in the hundreds rather than the thousands of pounds.
But this analysis was based on a misinterpretation of the rules. I’m not ashamed to say it - and according to Bruce Davies, founder of FCA-regulated renewable energy crowdfunding platform Abundance Generation, I was not the only one to read the paper this way.
However, the test for marketing crowdfunding investments is that unless they are dealing with sophisticated or HNW prospective clients, the investors must be advised or (note: not ‘and’) be investing less than 10 per cent of their portfolio.
This is a far more reasonable proposal, of course. But it does not mean that all is necessarily well with the paper.
Firstly, while as I said last week I am happy to see the regulator promoting advice, according to Mr Davies there are hurdles to clear before this is something advisers will be able to embrace.
One particular issue is that his platform typically does not offer due diligence or research on any of the investments it lists. He said this would be impossible as the average ‘raise’ of around £70,000 means it is not cost-effective to do so.
This means an adviser would have to do the due diligence - and post-Retail Distribution Review, those two words have taken on greater significance. Given the size the of the average investment in this space, it might well be that it is simply not viable for advisers to undertake this task.
Mr Davies said: “We are at a bit of an impasse as we don’t raise enough to do due diligence. It’s an unintended consequence of the RDR that research is at a premium... advisers find it hard to fit this in their RDR process.
“We tend to find advisers themselves like the idea of crowdfunding, but they are waiting for the research and due diligence to be on hand, otherwise they have to do it themselves and they are not earning commission and the the pots are small.”
Mr Davies argued that in fact the whole notion of the appropriateness test for crowdfunding is based on a flawed precept: that it is ‘high risk’ because it deals with equity and debt.
He explained that the FCA had lumped ‘crowdfunding’ in with all ‘unlisted’ shares and applied the rules for this area that are derived from the European Markets in Financial Instruments Directive (Mifid) relating to - in the FCA’s words - “complex financial instruments”.