By Richard Wheat on Tuesday 21 June 2016
Crowdfunding has exploded in the UK in recent years, with investors tired of rock-bottom interest rates keen to look for alternative places to put their money.
In an era where everything can be done at the touch of a button, the modern feel of crowdfunding, and the way it brings investors together as part of a partnership (something banks could only dream of), is helping it grow rapidly.
Nesta, the research organisation and charity, revealed the UK’s alternative finance market grew by 84 per cent in 2015, with crowdfunding playing its part in that growth alongside P2P lending.
That growth may well continue but as with any burgeoning industry there are hurdles which need to be overcome. So what are some of the issues facing the sector and how is it tackling them?
Investors searching for returns in today’s record-low interest rate environment are considering crowdfunding as an alternative to bank deposits, with attractive yields well above the returns from traditional savings accounts.
However, unlike cash accounts at banks which are covered by the Financial Services Compensation Scheme, there is no equivalent safety net provided by the crowdfunders.
Clearly investing in start-up businesses is risky and every investor considering crowdfunding as an option needs to take this into account.
But the point is becoming more pressing because of some high-profile failures. In February Rebus, the claims management group that raised more than £800,000 from investors, became one of the largest crowdfunding failures in the UK thus far.
Meanwhile Upper Street, a company which allowed customers to design their own shoes, was the subject of a damning article last week having tried to raise additional money via crowdfunding despite being on the edge of insolvency. Those who lent money to the business are unlikely to receive any of their investment back, according to the report.
Thankfully the industry is taking steps to address this. Some crowdfunding platforms - the gatekeepers for much of the fundraising being carried out - are beefing up their due diligence processes, and already reject more businesses seeking funding than they actually work with.
Where possible the platforms are also suggesting to businesses looking to crowdfund that they include some form of security - be that a covenant against a property or some such other form of protection. More of these types of offer would be most welcome.
Given the popularity of crowdfunding (and the increased access to it via the freshly launched Innovative Finance ISA), it is both sensible and timely that the Financial Conduct Authority (FCA) is reviewing the industry.
Those situated in Canary Wharf face a tough balancing act between protecting consumers and allowing innovation to thrive.
Regardless of the findings, the more important point - and the real benefit to crowdfunding - is that the review itself should improve practices within the crowdfunding space.
It may also help to instil some confidence in investors if they can see that the regulator is taking an active interest in the sector. After all, the FCA has the power to fine, or even close, firms which flout its rules, and as it becomes more familiar with how crowdfunding works, it will be able to ensure customers are being treated fairly.
A united voice
As many other sectors within financial services would no doubt affirm, it is better to have a united voice when dealing with regulators and politicians than to stand alone and risk putting your head above the parapet.
The good news for the increasing number of crowdfunders in the UK is that the UKCFA, formed in 2012 by 14 companies in the sector, is not only growing (it now totals over 40 members) but is also evolving how it works.
It is important for crowdfunding that the UKCFA - or a similar organisation - not only exists, but thrives.
A sector which can speak with a clear voice on matters which impact it can be a driving force for change, and indeed it has already created a code of practice which goes someway to protecting consumers and putting them at the heart of offers being structured by potential borrowers.
If the UKCFA can continue to do more on this front it should help the sector avoid becoming beset by the kind of scandals which have rocked other segments within financial services.
Richard Wheat is an entrepreneur and founder of MRM, an award-winning communications consultancy.