FCA to tighten crowdfunding regulations

FCA to tighten crowdfunding regulations

The Financial Conduct Authority (FCA) is to modify rules for the loan-based and investment-based crowdfunding market.

The changes will be based on feedback received on how its existing rules from 2014 were faring.  

Proposals for new rules to be considered in the first quarter of 2017 include strengthening rules on wind-down plans; additional requirements or restrictions on cross-platform investment and extending mortgage-lending standards to loan-based platforms.

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The proposals, which will go out to consultation, were based on several pieces of feedback.

The regulator found investors were struggling to compare platforms with each other or to compare crowdfunding with other asset classes due to the complex and often unclear product offerings.

The difficulty for investors to assess the risks and returns of investing on a platform was also highlighted as cause for concern for the City watchdog.

 Financial promotions were also found to not always meet the FCA's requirement to be ‘clear, fair and not misleading’.

The complex structures of some firms was also found to introduce operational risks and/or conflicts of interest that are not being managed sufficiently.

Certain features, such as some of the provision funds used by platforms, were also found to introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors  

The plans some firms have for wind-down in the event of their failure were also found to be inadequate to successfully run-off loan books to maturity.

The FCA’s current rules on loan-based and investment-based crowdfunding platforms came into force in April 2014.

The rules aimed to create a proportionate regulatory framework that provided adequate investor protection whilst allowing for innovation and growth in the market. 

Andrew Bailey, chief executive of the FCA, said: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers.

"Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified."