The Financial Conduct Authority has confirmed new rules governing crowdfunding that will introduce an ‘appropriateness test’ requiring firms to check prospective clients are either advised, defined as ‘sophisticated’, or only investing a maximum of 10 per cent of investible assets.
The final rules affirm that the regulations cover two of the five main crowdfunding forms defined by the FCA: namely loan-based and investment-based.
Other forms include donation-based, rewards-based and ‘exempt’ crowdfunding, which either do not provide returns based on the performance of the underlying assets or only allow investments into areas exempt from authorisation, such as enterprise zones.
According to the FCA last year £28m was raised through investment-based crowdfunding, representing an increase of around 600 per cent.
Loan-based crowdfunding, mainly peer-to-peer lending, will be regulated by the FCA from April 2014. Last year £480m was lent by consumers to other individuals and businesses.
The regulator consulted on its proposed rules in October of last year and has confirmed that the provisions remain largely unchanged, including a rule that requires companies to check investors placing more than 10 per cent of investible assets are either advised or ‘sophisticated’ investors.
Despite some responses demand a more prescriptive approach, the FCA said it will not set a minimum standard requirement for due diligence of underlying assets, adding that it is up to firms to determine the risks involved and implement appropriate processes to deal with them.
As well, the FCA confirmed that loan-based crowdfunding would not fall under the remit of the Financial Services Compensation Scheme, and that firms should therefore ensure clients understand the risks involved.
Christopher Woolard, director of policy, risk and research at the FCA, said: “We want to ensure that consumers are appropriately protected - but not prevented from investing.”
Among other proposals, the FCA said firms promoting crowdfunding should engage with financial advisers if they wish to market to non-sophisticated retail investors.
Under the new rules, retail investors will be able to invest up to 10 per cent of their portfolios in these projects.
Ayan Mitra, chief executive officer of equity crowdfunding platform CrowdBnk, said: “This ensures crowdfunding remains available to all types of investor and, on the whole, we think the [FCA’s] approach strikes the right balance between consumer protection and access to investment opportunities.
“In an era where even established [small and medium-sized businesses] with strong track records are struggling to obtain funding from banks, crowdfunding provides an important alternative route to finance and makes it easier for all suitable investors to find and invest in quality businesses.”