Small Talk: We mustn’t let the FCA crowd out this new form of lending
‘It isn’t their job to tell people what they should or shouldn’t invest their money in’
The latest developments in the crowdfunding sector sum up rather neatly the British attitude to innovation and invention. Within hours of an announcement last week from Funding Circle, now the biggest player in the UK crowdfunding sector, that it has raised $37m (£23m) for an assault on the US market from investors including Facebook backer Accel Partners and Twitter funder Union Square Ventures, the Financial Conduct Authority (FCA) was unveiling a new regulatory regime for the sector.
Peer-to-peer lending and investment is one of the very few technology innovations of the web 2.0 movement that Britain can claim as its own. The idea began in 2005 with the launch of Zopa, which offers savers the opportunity to lend to individual borrowers, but was subsequently picked up by firms who saw the potential for a lending service aimed at credit-starved small businesses in the wake of the financial crisis. Funding Circle alone has so far enabled small businesses to borrow more than £160m.
Crowdfunding platforms such as Crowdcube and Seedrs have subsequently set up in order to facilitate equity investments in small businesses from the crowd. There are now a proliferating number of variations.
In fairness to the FCA, the crowdfunding sector itself has been a long-time advocate of closer regulatory scrutiny. It reasons regulation will give it credibility with a much wider investment public while also, hopefully, keeping out cowboy operators.
Nevertheless, the juxtaposition of Funding Circle’s exciting announcement – a British success story to be celebrated – with the FCA’s rulebook launch was striking. For there is a danger that parts of the new regulatory regime will cause significant damage to the sector. That threat exists even in the lending sector of the industry although the new requirements are mostly about the information given to lenders. The sting in the tail is the additional capital the services will be required to hold in order to protect lenders in the event of a platform going under. The intention is noble enough, but why not just insist on segregated accounts to keep customers’ money safe? And if they are to be regulated, why not include these sites within the safety net of the Financial Services Compensation Scheme, which would give potential lenders peace of mind?
However, it is the equity-based crowdfunding services that will be hit hardest by the FCA’s approach. It intends to ban the promotion of services to all but sophisticated or high-net-worth retail investors, or to those who promise they have taken independent advice or are not investing more than 10 per cent of their savings.
What the FCA is effectively saying is that investment in the stock of a company via a crowdfunding website is too high-risk for most small investors. The problems with that are twofold. First, it isn’t the FCA’s job to tell people what they should or shouldn’t invest in. And second, the regulator’s approach is inconsistent.
The FCA is absolutely entitled to make sure savers and investors are always given crystal clear information about risks. That’s the right approach, rather than a nanny-state rule that decides on people’s behalf an investment is too risky for them. Other routes into equity investment in high-risk, unlisted businesses are not similarly restricted. The crowdfunding sector will survive the threat, but this is an unwelcome intervention.
Banks are shortchanging SMEs with cost of credit
The argument over whether small businesses are being denied access to credit rages on, but one thing is for sure: the money that is being lent is not getting any cheaper despite the Funding for Lending Scheme that was intended to cut the cost of funding for banks offering credit to small businesses.
New figures from the Bank of England reveal that the average cost of loans of less than £1m to privately owned non-financial businesses was 3.8 per cent over the three months to the end of August.
And guess what the rate was during the three-month period that ended in July 2012 when Funding for Lending was launched? That’s right – 3.8 per cent.
Critics of the scheme say the banks are the problem. “These figures suggest that while banks are able to receive the taxpayer-funded cuts in the cost of their borrowing, they still haven’t been passing this reduction on to small businesses,” says Philip White, the chief executive of specialist financier Syscap.
“As a result, those small businesses are not reaping the full benefits of a policy stimulus which was designed to help them.”
Bank warns over big firms that bully
David Cameron thinks late payments to small businesses are a problem and now the Bank of England appears to have recognised the issue too. The latest report from its agents all around the country argues that the deliberate attempt by large businesses to extend the payment terms on offer to small business contracts is now causing widespread cashflow difficulties.
The Bank warned that agents say “working capital had become more strained for some smaller businesses as larger customers’ payment terms had lengthened, notably in the construction and retail sectors.” The agents also say large companies are now demanding cut-price work in return for swifter payment.
The Prime Minister’s recently-announced consultation on late payments can’t come soon enough. “For large firms to ask for a discounted price in return for paying invoices to small firms quicker is unfair,” says John Allan, national chairman of the Federation of Small Businesses. He is quite right.
Small Business Man of the Week: Jonathan Monjack, founder, The Happy Tenant Company
I founded the business in November 2011 with several other landlords who, like me, had become increasingly fed up with the stark choice that faces property investors.
Either you manage the property yourself – which may not be practical or even possible – or you have to put up with all the problems of dealing with a lettings agent.
The lettings agency industry is a virtual monopoly with some very murky practices – as a landlord, your return is reduced by high costs, huge mark-ups and hidden or secret charges.
Our business, though it sounds very obvious because it’s what everyone should be doing, was based on the desire to offer something that was more transparent.
We charge a fixed fee, starting at £750 a year per property, and for that we’ll provide a full management service and give the landlord a hassle-free service.
Our size – we have now got thousands of properties collectively worth £500m under management – enables us to secure all sorts of economies of scale from contractors and other suppliers that any individual landlord would never be able to get.
We do deal with some lettings agents – we pay them to find tenants, but this is where their involvement ends.
That’s what letting agents are good at, but we think we can do a better job of the rest of the property-management process.
We’re asset managers, rather than letting agents, and in a market which is booming there definitely seems to be a real demand for a service with greater integrity.
As Voltaire once said, “Ice cream is exquisite. What a pity it isn’t illegal”
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