The Financial Conduct Authority outlines how it will regulate crowdfunding

Consumers who want to invest in small or start-up businesses via crowdfunding platforms will receive clearer information about the business in which they are investing, under proposed new rules published today by the Financial Conduct Authority (FCA). The changes relate peer-to-peer lending and equity investment based crowdfunding, the two types of crowdfunding that need regulatory oversight.

Christopher Woolard, the FCA’s director of policy, risk and research, said:

"Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are. Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding."

Crowdfunding is a way businesses, organisations and individuals can raise money. Generally, it involves a number of people pooling money through a website, often called a platform.

Consumers willing to lend money to companies through peer-to-peer crowdfunding websites will receive explanations of the key features of the loans as standard. They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites, or platforms, will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses. A 14 day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. New prudential requirements will also be phased in.

The FCA has also proposed new rules for investment-based crowdfunding, which is already regulated.  The paper makes clear the FCA’s belief that these investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses. 

The proposals will make the crowdfunding market more accessible, will help foster competition and facilitate access to alternative finance options while also providing additional consumer protection. 

There are a number of different crowdfunding business models. Two require FCA regulation: investment-based crowdfunding and loan-based crowdfunding (peer-to-peer lending), of which the latter is a consumer credit activity. The FCA takes over regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014. More information on the different types of crowdfunding can be found in Notes to Editors.

The key proposals for loan-based crowdfunding platforms are as follows:

  • Information about the platform must be clearly presented and easy to find so customers know with whom they are dealing.
  • All communications must be presented in a way that the intended customer will understand. Platforms must not downplay risks or warnings.
  • Platforms must have resolution plans in place that mean, in the event of the platform collapsing, loan repayments will continue to be collected so those lending to firms do not lose out.
  • Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
  • Any promotions (such as print, broadcast or online advertising) must be fair, clear and not misleading. Promotions that are not can be banned by the FCA.
  • Where firms do not provide access to a secondary market, investors can cancel without penalty and without reason within 14 calendar days.
  • A minimum prudential requirement: either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher. N.B. the fixed minimum will be lower (£20,000) until April 2017, to allow platforms to acclimatise to the new regime.

For investment-based crowdfunding platforms, the FCA is tailoring an existing rulebook rather than creating a new one so there are fewer proposed changes. The key proposals are:

  • In the retail market, that firms can only promote these platforms to:
    • sophisticated investors, high net worth investors, retail clients who receive regulated investment advice or investment management services from an authorised person; or
    • retail clients who certify that they will not invest more than 10% of their portfolio (i.e. excluding their primary residence, pensions and life cover) in unlisted shares or unlisted debt securities.  This reflects the fact that most investments in start-up businesses result in a 100% loss of investment (between 50% and 70% of new businesses fail in the early years).
  • For non-advised clients, firms must assess appropriateness before allowing them to invest through the platform.
  • The restrictions the FCA has placed on the marketing of unregulated collective investment schemes, or UCIS, will apply to platforms that offer these investments.
  • In addition, while most platforms will simply be providing an introduction to an investment, they will need to think carefully about whether any supporting information they provide (such as a star rating or ‘investment of the week’ award) amounts to advice. If it does, the firm will need to apply to FCA for permission to advise on investments.

As with every consultation, interested parties are encouraged to give their feedback so that the final policy is as rounded as possible.

On 3 October 2013 the FCA set out in detail how it would regulate consumer credit when it takes over responsibility in April 2014 from the OFT.

Notes to Editors

  1. The FCA’s consultation paper on crowdfunding.
  2. More information about different types of crowdfunding and some facts and figures:
    • There are a number of different types of crowdfunding, some of which require regulation and some that do not. These are set out below. Only the first two are regulated activities.
      • Loan-based (i.e. peer-to-peer lending): lending money to individuals or businesses in the hope of a financial return, such as interest payments
      • Investment-based: investing directly or indirectly in new or existing businesses by buying shares or debt securities, or units in an unregulated collective investment scheme.
      • Donation-based: gifting money to enterprises or organisations people want to support.
      • Reward-based: for example, supporting a band and receiving their new CD in return.
      • Exempt activities: investing or lending money using organisations that do need to be authorised or investments that do not need to be regulated.
    • The crowdfunding market is currently worth about £360m in the UK. The vast majority of crowdfunding (90 %) is currently conducted through peer-to-peer platforms.
  3. On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  4. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  5. Find out more information about the FCA, as well as how it is different to the PRA.