New plans will restrain peer-to-peer lending and the loan-based crowdfunding industry due to worries that consumers do not fully understand what they are investing in.

Peer-to-peer lending (P2P) and loan based crowdfunding have been expanding aggressively since the financial crisis in 2008 by exploiting the weaknesses of traditional banks. P2P is compelling to businesses as such lending provides the opportunity to receive cash quickly without the business having to give away any of its equity. Once the cash is received, the business then pays interest on the money that it borrows (similar to a loan from the bank).

However, there are risks with using P2P. It could be seen as higher risk due to aggressive valuations and there are concerns that the regulation is not what it should be. For example, a peer-to-peer lender based in Manchester (operating under collateraluk.com) went into administration in March of this year as a result of trading without a FCA licence, putting £21m of investor’s money at risk.

As P2P can play a valuable role in providing finance to small businesses and individuals, it is essential to consumers that regulation stays tight and up to date as markets develop – especially as business models have tended to become increasingly complex.

The FCA has appreciated this, and is leading new plans to restrain the industry and improve overall standards. The key proposals include ensuring investors receive reasonable information about any investments to ensure they understand the risks involved and expanding upon the current marketing restrictions on the P2P industry.

The FCA’s proposed changes ensure sustainable development to the market and appropriate protections for consumers by improving standards within the sector. They aim to have the new rules published within a Policy Statement later this year.