Watchdog announces crackdown on crowdfunding and peer-to-peer lending

Investors are unaware of the level of risk and should be protected, the Financial Conduct Authority says

The FCA will consult on new rules for the crowdfunding sector (Reuters)

Crowdfunding firms should face a crackdown because people are unaware of the risks they pose, the UK’s financial watchdog has said.

The Financial Conduct Authority found evidence of “potential investor detriment” and suggested peer-to-peer platforms should be governed by standards similar to those applied to mortgages.

Crowdfunding allows ordinary consumers to buy stakes in new start-ups or lend to them, often through website platforms such as Kickstarter, Indiegogo or Rockethub.

Around one in five crowdfunded businesses fail and and only 22 per cent of investors realised a return for through a sale or exit, according to AltiFi Data. The FCA said investors were not made aware of this level of risk and that it would consult on more regulation to protect investors in the fast-growing sector.

It found it was difficult for investors to compare platforms with each other, to assess risks and returns and financial promotions do not always meet requirements to be “clear, fair and not misleading”.

The FCA was also concerned that there were inadequate provisions in the event that a firm went bust and could not repay borrowings.

A fresh consultation, to begin in the first quarter of 2017, will look at strengthening rules on wind-down plans, additional requirements on cross-platform investment and extending mortgage-lending standards to loan-based platforms.

Andrew Bailey, chief executive of the FCA, said: “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.

“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.”

Some in the sector criticise the watchdog for being slow in authorising firms, but Mr Bailey said business models were continually changing, making it more time-consuming for the regulator to vet applications.

The FCA said its review found in both loan and investment crowdfunding that it was hard for investors to compare platforms with each other, or compare crowdfunding with other asset classes.

Financial promotions were not always clear, fair and not misleading, and the “complex structures” of some firms created operational risks.

“It is difficult for investors to assess the risks and returns of investing on a platform,” it said.

The watchdog said it has “challenged” some firms to improve standards in handling customer money.

Additional reporting by agencies