New FCA rules on crowdfunding boost consumer protection


UK consumers using loan-based, or securities-based crowdfunding platforms will have access to fair, clear information that is not misleading from April this year, under new regulations announced by the Financial Conduct Authority (FCA) on Thursday.

A consultation paper on the proposed rules was published by the FCA in October 2013. The proposals had three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. According to the FCA, it received positive feedback and support for its consumer-oriented approach.

The FCA already regulates securities-based crowdfunding, which allows people to buy shares or debt securities in a company. Better protection will now be provided for people looking to lend money or invest through the rapidly growing crowdfunding market. Around GBP28m was raised for growing businesses in 2013, an increase of approximately 600% compared to 2012.

Loan-based crowdfunding, which is mainly peer-to-peer (P2P) lending, reportedly saw consumers lending £480m to individuals and businesses in 2013, an increase of about 150% in comparison to the year before. This type of lending will be regulated by the FCA from April, which will ensure that consumers who plan to make loans to individuals or businesses are given clear information. The new regulations will enable consumers to assess the risk and to understand who will ultimately borrow the money.

Firms running loan-based platforms will be required to have plans in place to ensure that loan repayments continue to be collected, even if the online platform gets into difficulties. New prudential regulations will also be introduced over time, so that these firms have capital to help withstand financial shocks. This ruling is important, as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme.

The new FCA rules for securities-based crowdfunding are intended to keep the crowd in crowdfunding by allowing anyone to invest up to 10% of their available assets. Those who take advice or have the relevant knowledge and experience can make further investments. The ruling also applies to equity and debt securities such as mini-bonds, which are difficult to cash in.

Investors will also be provided with the same level of protection for either online or offline engagement with firms, as a result of direct marketing or telephone selling.

Christopher Woolard, director of policy, risk and research at the FCA, commented:

“We want to ensure that consumers are appropriately protected – but not prevented from investing.

“We have been careful to listen to feedback from the market and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding.”

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