The FCA published further findings on the crowdfunding industry late last week, continuing to take more of an active interest in a sector which is expanding rapidly.
Its wide-ranging feedback statement covered a lot of ground, with some sensible steps likely to be taken to protect consumers in the event that one or more platforms were to fail.
There was also a sense that, while offering the usual platitudes around not wishing to stifle innovation, the FCA is going to make some wholesale changes to the market, particularly when it comes to loan-based crowdfunding.
Ultimately, the FCA is concerned with two things: are investors being ripped off and is there a risk that they could lose all their money? This latest consultation is designed to ensure they are protected whilst also giving a nod to the regulator’s own objective to prevent systemic risks building up which can spread rapidly if left unchecked.
Whether it will take the sector to task is not yet clear, but in the words of David Walker, partner at international law firm Memery Crystal, this detailed document would suggest that platforms should ready themselves for the FCA to “bare its teeth” in the new year.
So what are the key takeaways from the paper? Below is a summary of changes the FCA may be making next year:
– Wind-up plans: Perhaps drawing on its experience of failed wind-ups in other sectors, the FCA has said plans need tightening up for loan-based crowdfunding platforms, so that existing loans can continue to run smoothly if a platform goes under.
Ayan Mitra, CEO of crowdfunding platform Code Investing, said this was the most crucial of the proposals. “This is very important for the sustainability of the loan-based crowdfunding industry and in general should apply to all intermediaries who are providing services to the underlying lenders or investors.
“We have always ensured that in the event of us not being around there are third parties who will continue to service our clients without interruption.”
– Cross investments: Another pivotal point according to Mitra, the FCA wants to prevent one bad loan originated on one platform from blowing up and spreading to others which also offer the same loan. There are no details yet, but expect the regulator to limit the amount of platforms which can offer the same product in future.
“Diversification to reduce risk is paramount because without exclusivity to a platform it could lead to cross-contamination of risk,” Mitra said.
– Mortgage lending-style criteria: One eye-catching proposal is to introduce mortgage lending standards for individuals seeking loans from peers, and this appears more than likely to be introduced following initial positive feedback. This certainly seems like one of the more workable proposals, but as ever the sticking point will likely be how rigorous the approvals process is.
Mitra says: “Platforms should make sure that the credit for the individuals should be estimated as accurately as possible, but if platforms have to mirror the mortgage application process (which is long winded and time-consuming process) then it would be a shame.”
– Client communications: An ongoing issue, the FCA is concerned that promotions to consumers interested in crowdfunding are below par, and it is becoming ever more likely that the FCA will have to deliver prescriptive rules on this next summer.
– Investment limits: The FCA is concerned that consumers might not know what kind of risks they are really taking when making any crowdfunding investments, particularly in the loan-based sector. As such, it is considering setting investment caps which will limit the amount of cash they can put into individual investments.
Walker said investment limits could in essence be used as a form of protection if client communications are not improved.
“A common standard or level of information disclosure should, perhaps, be welcomed, and indeed a failure to place emphasis on information, disclosure and risks may result in the FCA further considering another way of protecting investors from harm via the setting of investment limits,” he said.