The Regulatory new age approaches!

Fear not, I’m not suggesting that an Armageddon like, end of days scenario is fast approaching for honest folk of P2P and crowdfunding, merely that the regulators will soon – rather like Zarastrutha talking unto the masses – be sharing with us their first take on regulating the fast growing space.

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In fact if you get any bunch of AltFinance people in a closed and confined space – last week it was the turn of the crowdfunders via their annual shindig for the UKCFA  - and they’ll soon start talking about what may be on its way!

The cause of all this excitement of course is that the first FCA consultation paper is due out in October, explaining how the regulators might position their attempts to manage the growth of the sector.

Obviously no-one really knows what the FCA is thinking – including I’d suggest the FCA – but I suspect its highly likely that the men and women in grey suits will be taking a quite sophisticated approach to the sector, differentiating between specialist sub sectors and different platform types.

One key driver is that the Treasury wants and needs P2P lending to succeed and it’ll be very careful about the FCA strangling the sector with its typical micro-management. Also the Treasury knows that real shareholder value is being created by many leading platforms, which will benefit the City, and that the UK leads the world in P2P lending and crowdfunding.

OK, so far so good.

The other good bit of news is that lurking in the background are the good folk of the Bank of England and its assorted army of pointy heads including financial stability experts such as the superb Andy Haldane, who can boast a very detailed understanding of the sector.

The bad news is that the FCA won’t be able to help itself.

Remember that the words light tough and FCA rarely ever go together in one sentence, especially when retail investors are involved – their principle is a precautionary, pro-active one that seeks simplified, lower risk solutions for the great army of unwashed investors. With FCA authorisation fast approaching in April 2014 (although actual applications for authorisation needn’t be in until 2016), FCA regulators will be terrified that they could walk into a sector that could produce some awful consumer disaster many, many years hence – at which point the politicians and the media will crucify them for losing Great Aunt Agatha’s nest egg!

What will be on the FCAs collective, Borg like mind be thinking at the moment? I’d wager that they’ll be looking at some or all of the following:

- The Great Aunt Agatha nest egg problem aka loss of capital and what could be done by platforms to mitigate asset class volatility and fraud

- Liquidity or why Great Aunt Agatha and her IFA couldn’t sell their loans/equity/debentures when all hell broke out and everyone seemed to head for the door, and couldn’t get a proper mark to market price

- Capital requirements on the platforms will increase. That’s good news for the investor, bad news for innovation as I can guarantee that the FCA will set the level too high and make low risk firms carry too much capital….just in case…remember that precautionary principle I mentioned earlier!

- The definition of investor ‘knowledge’ will also be crucial i.e is the investor smart enough and rich enough to make an investment in this most alternative of spaces. This could mutate into a requirement for a minimum investment or an investor test, focusing on only letting in high net worths and sophisticated types.

- Codes of conduct will be the norm I suspect, strictly enforced with ‘lighter’ touch control over P2P and tougher controls over crowdfunding. I’d probably agree with Nick Moules from the Rebuilding Society when he argues that ” Crowdfunding faces arguably a tougher road and more objections to how it wants to operate”. I can sense the FCA looking on the likes of Crowdcube and Seeders as intrinsically higher risk platforms that should only be used by angel types. By contrast one suspects that rewards and donations based platforms will escape obtrusive legislation.

- Last but by no means least how much due diligence will the platforms undertake when they allow on opportunities.

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