We’ve all seen them. Whether browsing the net or taking a seat on the tube, adverts for crowdfunding projects are everywhere nowadays.
What are not quite so widespread are the risk warnings that those advertising crowdfunding should be putting front and centre in their marketing.
You might ask why this matters. Surely, you might reason, investors know that crowdfunding products can be risky investments, and are not covered by the FSCS?
But making such an assumption is dangerous, and a crackdown on those that flaunt the rules would actually serve as a timely reminder that the Financial Conduct Authority (FCA) is reviewing the sector closely.
Regulator due to clarify guidance
An official statement is due at some point in 2016 from the regulator and hopefully it will not only provide some helpful guidance for firms and investors, but also focus on the structure and terms of some of the offers out there.
While the FCA is not a product regulator, it could use its influence to force firms to tighten up on the kind of investments they are promoting.
While the FCA is not a product regulator, it could use its influence to force firms to tighten up on the kind of investments they are promoting to make sure consumers are firmly at the forefront of executives’ minds when these offers are being drawn up.
The devil is always in the detail when it comes to any investment sold to retail investors, and crowdfunding is no different.
The devil is always in the detail when it comes to any investment sold to retail investors, and crowdfunding is no different. Certainly the structure and terms of some of the products in existence now will almost inevitably end up at the centre of some scandal or other in the future.
FCA must avoid stifling the crowdfunding sector
As ever, those situated in Canary Wharf face a tough balancing act between protecting consumers and allowing innovation to thrive. While investors must indeed be made aware of all of the risks involved with crowdfunding, as the FCA moves forward with its review it is paramount that it also avoids stifling the sector.
Crowdfunding is doing more than any other initiative to unshackle businesses from the monopoly high street banks had over lending.
There are two reasons for this. Firstly, since crowdfunding is doing more, post the financial crisis, than any other initiative to unshackle businesses from the monopoly high street banks had over lending, it needs to be allowed to continue to disrupt the status quo. For too long the big banks have had the playing field tilted in their (and their shareholders) favour, despite the fact that the vast majority of complaints are, in fact, about them.
Over-regulation of crowdfunding would therefore be a disaster, and not just for businesses but for the Government. Clearly it is attempting to break the stranglehold that the mainstream banks have on lending and move away from a world where certain institutions deemed “too big to fail” are protected no matter what, and crowdfunding can be core to that.
Secondly, crowdfunding and peer-to-peer lending are in direct contrast to the “me, me, me” culture which banks have fostered for so long. Banks have scared off any would be investors by baffling them with jargon but crowdfunding can help encourage them to take more charge of their own finances, thanks to its emphasis on borrowers and lenders working together and sharing in the rewards.
We all have a bottom-line of course, and it would be naive to say crowdfunding will do away with a focus on maximising our own personal returns. But at least – with so much more interaction between businesses and lenders – it should help ensure all parties understand more clearly where the money is being invested, and for what purpose.
It would surely be tragic if this emerging disruptor of the way lending is carried out in the UK, which firmly puts borrowers and lenders at the heart of what it does, was shut down by an overzealous regulator.
Richard Wheat is an entrepreneur and founder of MRM, an award-winning communications consultancy.