FCA boss Andrew Bailey says it is necessary to strengthen investor protections, with standards of disclosure also needing improvement.
The FCA, which took over supervision of the crowdfunding (both loan and investment based) market in April 2013, has issued an update on its post implementation review of the market, which began with a call for input in July. Based on feedback received since the summer, and in addition to its own findings during the ongoing authorisation process, the City regulator has determined that a number of rules across the industry will require modification.
The FCA plans to consult on additional rules for the market in early 2017. These include “more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based” platforms.
For loan-based platforms specifically, the regulator will also look to strengthen the rules surrounding wind-down plans, extend mortgage-lending standards to platforms and – in what is something of a curveball – to enforce additional “requirements or restrictions” on cross-platform investment.
“Cross-platform investment” refers to a consumer investing via a single platform, but across loans that have been originated by a number of other platforms. The primary concern here is not with “aggregators” – firms that act only as points of access, without originating loans. What the regulator appears to have taken issue with is platforms that both originate loans themselves, while also aggregating origination from other platforms.
The FCA has also said that it could consider “setting investment limits to cap potential consumer harm”.
“Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers,” said Andrew Bailey, Chief Executive of the FCA. “Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”
For both loan and investment based crowdfunding platforms, the regulator deems it “difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes”, due largely to the complexity of some offerings. Indeed the complexity of some firms is deemed by the FCA to introduce operational risks and conflicts that “are not being managed sufficiently”.
The regulator says that it is difficult for investors to adequately assess risk and return. Meanwhile, in both segments of the market, some financial promotions appear to be missing the mark on being “clear, fair and not misleading”.
Loan-based crowdfunding, by far the larger portion of the industry, seems to have attracted the greater weight of regulatory scrutiny. In addition to the concerns shared by both segments of the industry, the regulator also identified a number of key issues that are specific to the debt-based platforms. Provision funds stood out as one such issue, as did “inadequate” wind-down plans. The FCA also states that it has “challenged some firms” to improve their client money handling standards.
Other concerns raised by the regulator about debt platforms included: regulatory arbitrage with the banks and asset managers, maturity mismatching, the unfair treatment of institutional investors, and liquidity risk for IFISA investors.
For investment-based platforms, other issues included: the management of conflicts of interest (one example given is that of a firm raising money for itself via its own platform), standards of due diligence, and client assessment rules,
The FCA received 90 responses to the call for input. You can access the feedback statement in full by clicking here.
The regulator plans to report on the final conclusions of the post-implementation review in mid-2017.
“We are happy that the FCA is applying rigorous standards to the whole industry: as a founding member of the P2P Finance Association, we have worked to set high levels of disclosure and transparency which are unmatched elsewhere in financial services. We’ll continue to work with the FCA to ensure that our market works in the interest of investors and borrowers."
“We welcome the FCA’s review and support the focus on investor protection. Platforms must fully disclose information about risk and returns which is why Funding Circle publishes performance data on every single loan. Investors have now lent £1.8 billion to small businesses through the Funding Circle platform, supporting the creation of 40,000 new jobs."
Christine Farnish, chair, P2PFA:
"The critical test for any review of this sort is whether the sector is, overall, delivering beneficial outcomes for investors and borrowers. It is not easy for a regulator to grapple with new market entrants, especially when they are disrupting traditional business models and challenging powerful incumbents. We trust that the critical consumer outcomes test – based on a balanced and evidence-based assessment of benefits and risks – will be applied as the Review moves forward."
“Due diligence is a key part of any investment decision and for most crowdfunding opportunities there is no institutional level financial scrutiny. The separation of the due diligence process away from the platform listing process, and undertaking of this by a third party rather than the platform, is a fundamental requirement."