Update on post-implementation review of UK loan and investment based crowdfunding market

By Jonathan Lawrence

The UK’s Financial Conduct Authority (FCA) has given an update on the post-implementation review of the UK loan-based and investment-based crowdfunding market since current rules came into force in April 2014. The FCA says it believes it is appropriate to modify a number of rules for the market.

For both loan-based and investment-based crowdfunding platforms the FCA has found that, for example:

  • it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings;
  • it is difficult for investors to assess the risks and returns of investing on a platform;
  • financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’; and
  • the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.

In the loan-based crowdfunding market in particular, the FCA is concerned that, for example:

  • certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;
  • the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity; and
  • the FCA has challenged some firms to improve their client money handling standards.

The FCA plans to consult on more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms. For loan-based crowdfunding the FCA also intends to consult on:

  • strengthening rules on wind-down plans;
  • additional requirements or restrictions on cross-platform investment; and
  • extending mortgage-lending standards to loan-based platforms.

The FCA’s ongoing research and investigatory work should be completed early in 2017. At that stage, the FCA will determine whether further consultation on rule changes is needed.

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