Keep calm! Responding to the FCA's post-implementation review

The FCA’s Call for Input (CfI) for the post-implementation review of the FCA’s crowdfunding rules (the Review) resulted in a flurry of headlines on Friday and raised both eyebrows and expectations. It is important to bear in mind the facts though before we presume to know what the conclusions of the Review will be and resist the temptation for misconstrued sound bites or self-interested promotion.

a man in a suit smiling

Although the post implementation review was always inevitable, it is yet another milestone in the industry’s development and maturation which no doubt we’ll be seeing a lot more of as economic and monetary headwinds unsettle what has been a relatively benign economic environment for it to flourish in to date.

Which brings me to my first point. The timing of the FCAs review is interesting; although CfI responses aren’t due until 8th September the industry is on the crest of a huge wave of change which we will have only just started to ride. There is a new PM, CEO at the FCA, potentially new Labour leader, potential rate change, economic slowdown, a slew of P2P authorisations, all accompanied by an increasing number of IFISAs, to name but a few.  Whilst I appreciate time waits for no one it is important that, regardless of arbitrary deadlines, that both industry and regulators maintain vigilance. 

The industry is no doubt facing a reckoning that I believe, when successfully navigated, will enable participants to claim their position in the mainstream and consign the oft quoted criticism ‘we don’t know how you will perform in a downturn’ to the bin.

In light of this flurry of activity, it’s unfortunate that headlines jumped on side bites like ‘probe’ and ‘concern’. The FCA said it would undertake the Review when it first issued crowdfunding regulations in 2014.  The fact the FCA has expressed interest and concern is a natural result of giving over 100 hungry businesses the ability, space and support to innovate within what is widely billed as the global gold standard regulatory regime for crowdfunding.

It was noted for example the FCA was concerned about whether the IFISA was attracting the wrong type of investor. The reality is only two smaller IFISA managers have launched and so the question appears to not only be putting the cart before the horse, but it is also repeating concerns which the FCA raised, and had an opportunity to mitigate, in DP15/6 and PS 16/12. It is fair to say though, that if the industry and the FCA can address the other concerns raised within its review that minimise consumer detriment (such as potential risks associated with liquidity mis-matching) and make disclosures more transparent then arguably the risk of attracting the wrong investor is greatly reduced.

My other observation is there was little consideration given to the future innovation within the industry. There was no mention of financial advisers or third party investor platforms – something that no doubt will yet again push the boundaries of regulatory oversight, especially if the IFISA opens the industry up to new investor segments and sources of capital – as we’ve seen in the US.

My final observation, especially in reference to the FCA’s comments on regulatory arbitrage, is whether now is the time for the FCA to bite the bullet and split the loan-based from the equity-based form of crowdfunding; especially as loan-based is larger, more akin to banking and has higher levels of institutional involvement and represents very different risks for investors and other participants. 

Regardless of the Review’s questions and deadlines, one thing that is for sure is that we’ll know a lot more about the industry’s robustness over the coming few months and so I would urge all respondents to take their time in formulating their responses so to give any impending phenomenon a chance to play out.

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