Will the FCA’s binned banking review sow the seeds of disaster for alternative finance?

By Richard Wheat on Tuesday 26 January 2016

Opinion

For the second time since the Great Recession, regulation in the UK is in a state of flux. The crash in 2008 saw the old “light touch” approach of the FSA swept away in the post-Northern Rock maelstrom, but just as the tide ebbs and flows, so does the weight of financial regulation.

On New Year’s Eve, knowing attention was limited during the holiday season, the FCA quietly announced it had scrapped the banking review it started just six months previously.

Then there was another U-turn, with acting FCA Chief Executive Tracey McDermott causing uproar after she appeared to suggest that the banning of sales commission, a fundamental tenet of the Retail Distribution Review, could be overturned during a recent radio interview.

While the FCA was quick to issue a denial following the interview, it has nonetheless revealed the inner conflicts at the heart of the regulator, and the difficulties it is facing behind the scenes as the entities it is paid to regulate make waves.

The most recent comments from McDermott are the most disturbing. If we were to see the return of commission following the scrapping of the bank review, it would complete a total reversal of decisions taken in the wake of the crisis. The initial implications are profound enough, but there is also the danger that such wholesale liberalisation also emerges in other areas, such as the crowdfunding space which itself is up for review later this year.

At MRM we would hope that there is no such slackening of the rules in the crowdfunding space. While some aspects of the current regime are unduly restrictive, we would not want to see the market opened up to all and sundry as this would leave consumers at the mercy of businesses which may not have their best interests in mind.

The crowdfunding sector will only thrive if the public have confidence in the investments they are being offered. This is increasingly important given the launch of impending savings products - such as the new alternative finance ISA - that will be able to incorporate crowdfunding investments. What the sector does not want to see is a situation where people investing end up feeling like they have been ripped-off. After all, investment losses in an ISA cannot be offset against tax as would be the case for conventional investment income, with the ISA holder only benefitting from the tax-free status of the wrapper itself. Consequently, if mini-bonds and crowdfunding turn sour for investors the one thing that can be guaranteed will be some sort of regulatory clampdown. This would be disastrous news for firms and investors alike.

As I’ve argued previously we have a rigorous set of parameters by which we judge crowdfunding projects and we turn down the opportunity to work on schemes that we do not think have been properly thought through. If there is going to be some sort of regulatory bonfire following the cancelled banking review, the FCA should think carefully before changing any of their rules on advertising. The present situation represents a sensible compromise between the needs of promoters to make people aware of opportunities, and the requirement to provide appropriate warnings.

So what would be the best action – if any – from the FCA’s review? Without a doubt, enforcement. Despite the introduction of the regulator’s crowdfunding regime in 2014, there are still many in the crowdfunding community who don’t seem to think the rules apply to them. This is very damaging to those that seek to play fair, and whose prospects are then subsequently weakened by promotions that pay scant regard to them. As long as examples of this bad behaviour exist any change to the existing regime would be premature. Instead of a relaxing of the rules then, the FCA should first concentrate on enforcing its financial promotions regime more seriously. 

Richard Wheat is an entrepreneur and founder of MRM, an award-winning communications consultancy.

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