The regulator says it received a number of responses to a recent review which raised issues and caused concern. It said the concerns suggested that in some cases investors did not fully understand the risks they faced with some crowdfunding investments.
Andrew Bailey, FCA chief executive, 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.”
It says that based on a review of the feedback, issues seen during the supervision of crowdfunding platforms currently trading and consideration of applications from firms seeking full authorisation suggest it is the right time to “modify” a number of rules for the market.
The FCA’s initial findings of loan-based and investment-based crowdfunding found that:
· it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings
· it is difficult for investors to assess the risks and returns of investing on a platform
· financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’ and
· the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently
In the loan-based crowdfunding market the FCA said:
· certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors
· the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity
· we have challenged some firms to improve their client money handling standards.
The FCA is to propose new rules to be considered in Q1 2017. These include more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms.
For loan-based crowdfunding the FCA also intends to consult on:
· strengthening rules on wind-down plans
· additional requirements or restrictions on cross-platform investment
· extending mortgage-lending standards to loan-based platforms
The FCA’s current rules on loan-based and investment-based crowdfunding platforms came into force in April 2014. The call for input in July 2016 launched a post-implementation review of these rules. The paper summarised market developments since 2014 and some of the FCA’s emerging concerns.