There has been much reported in the media recently about the risks posed by crowdfunding, so much so in fact that now even former FCA Chairman Lord Adair Turner has lent his voice to the debate.
Lord Turner has taken it upon himself to warn consumers that peer-to-peer lending could lead to big losses.
The surprising thing is that anybody should find this remarkable. Crowdfunding, like any other form of investment, will always involve an element of risk, and that won’t change. What needs to is the stance of the regulator, which is considering interfering further in the marketplace.
The crowdfunding rules are slated for a review by the FCA at some point this year and it would be a disaster for everyone if the sudden rush of concern about the sector resulted in consumers being banned from the market for their own good.
Lord Turner should understand this only too well. He was credited with restraining the instincts of some in the FCA to pretty much ban mortgage lending to a wide range of consumers in the initial drafts of the Retail Distribution Review. Just as the FCA recognised that there had to be some risk for there to be a functioning mortgage market, the same is true in crowdfunding.
We already have a comprehensive set of rules governing financial promotions in general and crowdfunding in particular, as well as further restrictions around what can and cannot be said by financial firms on social media.
It would therefore be completely irrational for a new set of rules to be shoehorned around the crowdfunding sector, not least because it might create a situation where consumers are able to take risks via investment funds, for example, but are barred from alternative investments like crowdfunding.
After all, while an investor can, in the worst case scenario, lose all their money via crowdfunding, the same is true of investing in almost anything else, including shares, property and bonds. Unless the FCA is going to crack down on all forms of investment it seems more than a little unfair to single out crowdfunding.
If there is a problem in the crowdfunding sector, it is because the regulator is not taking enough action to effectively enforce the rules. It is this that needs tackling, with proper punishments handed out to those who flout the rules, especially as the potential for mis-selling will only grow as more and more investors turn to crowdfunding to access attractive yields.
With the new alternative finance ISA around the corner it is no wonder that the regulator is nervous. But rather than introduce a whole new set of rules, the FCA merely has to make examples of those who break them. If it acts now it is far more likely to get the type of market it wants.
The worst of all outcomes would be for the FCA to allow continuing problems to fester, only to resort to knee-jerk regulation in response to public outcry further down the line. All this would do is ban consumers from diversifying their investments, while also robbing the borrowers of a much needed alternative pool of funding away from the banks. It would also, like many crackdowns, be another example of the regulator slamming the barn door shut when the horse has already bolted. And none of us want to see that happen again.
A nimble regulator should be able to police the market without destroying it. Let us hope that, when it comes to crowdfunding, the regulator can pull this off more effectively than in the past.