Five Questions On: Crowdfunding

This is the so-called democratisation of finance, isn't it?

That's what its fans would have you believe. They say crowdfunding and peer-to-peer lending cut out the banks – and reduce their big profits – by putting investors directly in touch with people who need money, whether that's businesses needing start-up capital or growth finance, or individuals needing loans. And it's proving popular. For instance this week the Burgundy winemaker Domaine Chanzy decided to use the crowdfunding platform Seedrs to raise funds for its initial public offering on AIM.

But not everyone agrees that it's the road to fairer finance?

Critics warn that it's a charter for assorted unscrupulous rogues and villains to profit from unwary folk.

That sounds harsh. Who says that?

Warnings have come from many quarters in the few short years since crowdfunding exploded on the scene, but this week it was the turn of the Financial Conduct Authority to publish some concerns about some of the misleading practices resorted to by crowdfunding firms.

What sort of things?

The regulator said its review of 25 investment-based crowdfunding platforms revealed that most of them were leaving out or "cherry-picking" information, leading to "a potentially misleading or unrealistically optimistic impression of the investment". Where risk warnings were included they were diminished "by claims that no capital had been lost".

What is the FCA doing?

Christopher Woolard, the director of strategy and competition at the regulator, said: "Our aim is to ensure that the growth we're seeing comes with appropriate investor protection in place." It has already forced firms to change websites but says it will continue to monitor them and conduct a full review in 2016 of the crowdfunding rules it launched last April.