FCA unveils long-awaited crowdfunding regulations
Amateur investors required to restrict crowdfunding to 10% of portfolio
City watchdog the Financial Conduct Authority (FCA) today unveiled its long-awaited plans to regulate the burgeoning crowdfunding sector, provoking a mixed reaction from start-ups and alternative finance providers.
Published following the release of a wide-ranging consultation paper announced in October 2013, the new rules will tighten and restrict how the industry operates, in a move which the FCA says will protect companies and investors using peer-to-peer lending and crowdfunding platforms.
Most notably, the new rules will require ‘inexperienced investors’ using equity-based crowdfunding platforms such as Seedrs and Crowdcube to certify that they will invest no more than 10% of their portfolio into companies listed on such sites.
Higher net-worth individuals and those who receive independent investment advice will be allowed greater amounts, the FCA said in a statement.
This ‘10% rule’, which the FCA claims will protect amateur investors from losing significant amounts of money in risky, unlisted businesses, has been criticised by some within the industry as undermining one of crowdfunding’s key strengths – allowing members of the public to get involved in backing early-stage businesses.
Barry James, founder of independent industry body The Crowdfunding Centre, said: “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.
“Make no mistake, the infamous 10% rule – however it’s dressed up – does just that: it takes the crowd out of equity crowdfunding.”
Despite the backlash from some within the sector, Luke Lang, co-founder of Crowdcube, appeared to welcome the proposals, saying he was ‘delighted’ that the measures finalised by the FCA were broadly in line with how Crowdcube operates today.
“The UK leads the world in equity crowdfunding and these changes will help build market confidence, ensuring that the crowd remains in crowdfunding and the industry can continue to flourish,” Lang said.
In addition to the 10% rule, equity crowdfunding platforms will be restricted from advertising their services to amateur investors, instead being required to target their marketing at experienced or high net-worth investors or advised retail clients.
Debt-based peer-to-peer lenders such as Funding Circle will be subject to less stringent rules than equity-based platforms, as the FCA sees them as less risky.
Regulations affecting debt-based lending will include a requirement for procedures to be put in place to allow repayments to continue, even if the platform itself falls into difficulty.
More generally, the FCA will require crowdfunding platforms to provide ‘clear information’ about the risks involved in using such services.
James Meekings, co-founder of Funding Circle, welcomed the FCA’s proposals, commenting: “The introduction of proportionate regulation will be a step-change for the industry and will cement our position within the wider financial landscape.
“The FCA has shown foresight in striking the balance between enabling the industry to continue to flourish, while ensuring the protection of investors and borrowers.”
The FCA regulations come as the alternative finance sector enjoys an unprecedented boom; recent figures released by the Crowdfunding Centre showed that £28m was invested in businesses listed on equity crowdfunding platforms, alongside more than £480m lent through peer-to-peer lenders.
Speaking to the BBC, Chris Woolard, director of policy, risk and research at the FCA, said: “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 hand, making sure this… source of funding is open to businesses and individuals.
“What we are saying [with the 10% rule] is, if you have never had experience of this before, we want you to gain experience before you make a large investment.”