By boosting consumer protection, the rules will help ensure that consumers have access to fair, clear information that is not misleading, when using loan-based, or securities-based crowdfunding platforms.
The crowdfunding market is small, but growing rapidly. Securities-based crowdfunding, which the FCA already regulates, allows people to buy shares or debt securities in a company. Last year £28m was raised for growing businesses, an increase of around 600 per cent compared to 2012.
Loan-based crowdfunding (mainly peer-to-peer (P2P) lending), which will be regulated by the FCA from April 2014, saw £480m lent by consumers to individuals and businesses in 2013, a rise of around 150 per cent on the previous year.
The rules on loan-based crowdfunding focus on ensuring that consumers interested in lending to individuals or businesses have access to clear information, which allows them to assess the risk and to understand who will ultimately borrow the money.
The rules also require firms running the loan-based platforms to have plans in place so that loan repayments continue to be collected even if the online platform gets into difficulties. Also, new prudential regulations will be introduced over time so that these firms have capital to help withstand financial shocks. This is important as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme.
The new rules for securities-based crowdfunding keep the crowd in crowdfunding by allowing anyone to invest up to 10 per cent of their available assets; while those who take advice or have the relevant knowledge and experience can invest more.
The security-based crowdfunding rules also apply to of equity and debt securities such as mini-bonds, which are difficult to cash in.
The new rules will provide the same level of protection to investors whether they engage with firms online, or offline as a result of the direct marketing or telephone selling.
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.
"We have been careful to listen to feedback from the market and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding."
Christine Farnish, Chair of the Peer-to-Peer Finance Association, said:
'We are pleased that the FCA is taking a proportionate approach to the regulation of peer to peer lending, in line with its competition and consumer protection objectives. Today's statement strikes the right balance between promoting innovation whilst not exposing consumers to significant risk.
“Peer to peer lending is a good news story for UK consumers and its growth should be encouraged. It is however important that all players in this new market operate responsibly. Formal regulation of the sector by the FCA should help ensure that this happens."
Ayan Mitra, CEO of CrowdBnk, a UK equity crowdfunding platform, said:
"We are pleased to see that the FCA has kept the 'crowd' in crowdfunding, by allowing anyone to invest up to 10 per cent of their available assets. This ensures crowdfunding remains available to all types of investor and , on the whole, we think the approach strikes the right balance between consumer protection and access to investment opportunities.
“In an era where even established SMEs 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.
“At CrowdBnk, we have complied with the FCA's measures for equity investments since our launch a year ago including Investment Caps for all appropriate investors, which we feel is the correct way to manage consumer risk. However, although the response will effect a significant step forward for the crowdfunding industry as a whole, we feel that the Regulator could have gone further in terms of standardised disclosure and due diligence on investee companies. This would enable investors to better compare information and make judgments based on their own personal circumstances, rather than 'following' the crowd into popular investments."
Stuart Law, CEO of Assetz Capital one of the world’s fastest-growing P2P lenders, commented:
“Make no mistake – the fact that P2P lending is being regulated and therefore recognised by Government and the regulators marks the beginning of a new era for alternative finance sources in the UK.
“The key rules are straightforward and sensible: P2P lending platforms must provide clear information to allow investors to assess risk and have plans and capital in place so that loans will continue to be repaid to investors if the platform defaults. All responsible P2P platforms do this anyway, so FCA regulation will strengthen the industry and make it even more attractive to investors.
“The document also confirms the FCA’s view that it is important to have the right people in place to manage risk – we have one of the most senior lending teams working in P2P lending, with experts in risk, regulation and lending technology at board level to ensure that we do everything we can to protect investors.”
