By Chris Maule on 19th May 2015
While the rapid growth of alternative finance has been well noted by the media and wider financial industry, regulators have struggled to keep pace. This is troubling and surprising as, without transparency and regulation, investors can be left unaware of the risks involved and unintentionally expose themselves to losses. If this happens alternative finance platforms will suffer, as money drains away from the sector and back towards more traditional forms of investment.
The FCA’s review of the regulation governing crowdfunding and P2P lenders earlier this year unearthed some potential causes for concern. It’s vital that our sector addresses these or it risks losing investor trust – not now, but when the next economic downturn arises, be that in one, three, five, or – if we’re lucky – even more years in the future.
One area for concern highlighted by the report was the lack of information provided by platforms to investors, with “insufficient, omitted or the cherry-picking of information” commonly noted. The FCA also highlighted the imbalance of information provided, particularly when it came to risks and benefits. It found that many platforms downplay the level of risk for investors by claiming that no capital has been lost, or by positioning risk warnings below more attractive performance information on their websites.
These concerns pose just as much of a threat to the platforms as they do to investors. If an investor suffers a loss, and the platform was not clear on the risks involved, the investor has a right to take action against the platform. This means that if a P2P loan, issued after 1 April 2014, defaults and subsequently results in a loss of £250,000 for the investors in the loan - the platform could be liable to make good on the loss suffered. It’s easy to see how this could become a big problem for platforms that don’t make the appropriate risk disclosures to their investors.
While the FCA now compels crowdfunders to make their communications fair, clear and not misleading at the point an offer is made to investors, legacy risks remain. At UK Bond Network we accept that higher risks are involved in lending money compared to holding it in a savings account. Our approach is to assess potential investors’ financial understanding and recognition of the risks inherent in any investment made through our platform. Coupled to that, we make clear both the specific and general risks associated with every bond listed on the platform, to ensure that investors have a deep understanding of the risks of the opportunity they are investing in. Whatever the approach, ensuring that investors are not mislead - either by omission or exclusion of information - is crucial to reduce regulatory risk at the platform level, and ensure longevity of business.
The altfi industry and its investors should not be dissuaded by increased regulation, but instead be reassured that a detailed report has been carried out. Increased scrutiny will only improve transparency in the sector, and is something that is here to stay. With a wider FCA review due to take place next year, it’s now within every platform’s best interests to take a mature, balanced approach to communicating the realities of their offerings to businesses and investors.