The most controversial element of the new strictures is new 10% rule. The FCA propose that inexperienced investors will now have to certify that they will not invest more than 10% of their portfolio in unlisted businesses. The regulatory body base this proposal on the fact that between 50% and 70% of start-ups fail in their first few years.
Chris Woolard, Director of Policy, Risk and Research at the FCA, explained:
"We're trying to strike a balance between on one hand making sure consumers are properly informed and have real clarity about the investments they are getting into but on the other making sure this... source of funding is open to businesses and individuals.
“What we are saying is if you have never had experience of this before we want you to gain more experience before you make a large investment.”
The FCA is also calling for crowdfunding platforms to be clearly presented, understandable, and to not skirt around the risks of seed-stage investment. Platforms should also have resolution plans in place in case of any failed business. Furthermore, The FCA is demanding that crowdfunding sites “assess the appropriateness” of users wishing to invest their money without aid of professional advisors.
So what does the industry have to say about all this? Anger and disappointment has been the overriding response.
Barry James, Founder of The Crowdfunding Centre, expressed severe disillusionment:
“On a day like today one has to wonder whether our FCA is the worst regulator in the western world. The words that spring first to mind are inflexible, stubborn and unimaginative. Maybe it's time for a change.”
Stephen Hazell-Smith, Architect and Co-Founder of AIM and PLUS markets, said:
"Last week the French regulator threw open the doors to its adult population to invest in equity crowdfunding as it pleases. This week our regulator has taken the crowd out of crowdfunding by putting in place rules on just who may be permitted to be an investor.
“How absurd to have the French beating us in a sector where we have the infrastructure in place to lead the world".
Barry James believes that the changes will corrupt the essence of crowdfunding:
“Make no mistake, the infamous 10% rule - however it's dressed up - does just that: it takes the crowd out of equity crowdfunding.”
Amanda Boyle, CEO of Bloom VC, took to twitter to echo those sentiments:
“The UK is now the only country where the crowd is regulated out of #crowdfunding. Now just another asset class for investors. Shame!”
The onset of regulation has been much-discussed and highly-anticipated in the alternative finance world. The logic of the FCA – attempting to ease rookie investors into the world of equity investment – is understandable. But the onus is also on the regulators to continue to nurture the development of one of Britain’s most promising industries. This immediate backlash suggests that the FCA may have miscalculated their “balancing act”.
Then again, for some platforms this wave of proposals represents real progress. Chris Maule, CEO and Founder of the UK Bond Network, said:
“We welcome the FCA’s regulatory approach and feel that it will prove to be beneficial to the longer term growth of the crowdfunding and peer-to-peer lending sector, as well as protecting the interests of investors. We share the view that promoting these types of platforms to certain types of investors is particularly important. We believe that it is crucial that all investors that use UK Bond Network have the knowledge and experience to understand the risks involved and our platform has been structured accordingly to reflect this view. This is something we have already placed a great deal of emphasis on and believe it should be standard.”
Regulation is a divisive issue, and certainly not one that we will have heard the last of.
You can view the full set of proposals here:
