FCA proposes rule changes for loan-based Crowdfunding platforms

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UK financial regulator The FCA has announced that it will be proposing changes to rules for crowdfunding platforms.

Following a post-implementation review of its crowdfunding rules, the FCA is opening a consultation on new rules for loan-based crowdfunding platforms. The FCA is asking for responses to this consultation by October 27, 2018 before publishing rules in a Policy Statement later this year.

The changes the FCA is proposing are designed to address the ways in which the loan-based crowdfunding model has developed since the FCA last reviewed the sector in December 2016. The FCA has observed the variety of loan-based crowdfunding business models, some of which have become increasingly complex.

Based on its findings the FCA is now inviting responses to a number of specific proposals to change the rules for loan-based firms which cover:

  • Proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved.
  • Ensure investors are adequately remunerated for the risk they are taking.
  • Transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors.
  • Promote good governance and orderly business practices.
  • Proposals to extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms.

In its December 2016 statement, the FCA also committed to addressing a potential gap in protections for customers buying a mortgage or taking out a home finance product through loan-based crowdfunding. The FCA is now proposing to apply rules which would normally apply to home finance providers to P2P platforms where at least one of the investors is not an authorised home finance provider.

By contrast, for investment-based crowdfunding platforms, detailed regulatory obligations already exist to manage the risk of investment business (typically under Markets in Financial Instruments Directive or Alternative Investment Fund Managers Directive, and in the FCA Handbook). The FCA there stated that it is not consulting on changes to the rules for investment-based crowdfunding platforms.

The FCA has also observed some poor practice by some firms in the crowdfunding sector, particularly among loan-based platforms. This has arisen as a result of both poor business practice as well as risks around certain business models. Proposals in this consultation seek to improve standards in the sector but in a way that leaves scope for further innovation.

Christopher Woolard FCA

Christopher Woolard, FCA

Christopher Woolard, executive director of strategy and competition at the FCA said:

When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.

The FCA stated that the consultation will be of particular interest to:

  • P2P platforms
  • investment-based crowdfunding platforms
  • trade bodies for these sectors
  • consumers and businesses investing or considering investing through an online crowdfunding platform
  • consumers and businesses that have entered, or plan to enter, into loan agreements as borrowers via P2P platforms
  • intermediaries who might refer home finance customers to P2P platforms
  • consumer organisations who might also like to consider the proposals

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