On 27 July 2018, the FCA published a consultation paper proposing new rules for loan-based crowdfunding platforms. The proposed changes are published less than two years since the last FCA review of the sector during which time the FCA observed the various loan-based crowdfunding business models.
The FCA said that all crowdfunding platforms are subject to the FCA Principles for Businesses, and specific Conduct of Business rules. However, during its review, the FCA observed some poor business practices in relation to, among others, disclosure of information to clients, charging structures, wind-down arrangements and record keeping. The FCA identified a number of potential and actual harms to investors, including poor customer treatment, unsuitable products, unreliable performance or disorderly failure and high prices for low quality products.
The FCA announced that it is largely content with the regulatory framework in place for investment-based crowdfunding platforms. Contrary to business models for investment-based crowdfunding platforms which tend to be relatively simpler, the P2P sector is more diverse with business models often providing for the platform to take decisions on behalf of the investor. Consequently, the FCA focused mainly on P2P platforms and proposed new rules where the existing ones were deemed insufficient.
The FCA put forward the following proposals with regards to P2P platforms:
- setting out the minimum information that P2P platforms need to provide to investors;
- introduction of more explicit requirements to clarify what systems and controls platforms need to have in place to support the outcomes they advertise they can deliver, focusing particularly on credit risk assessment, risk management and fair valuation practices;
- introduction of stronger rules on plans for the wind down of P2P platforms;
- extension of marketing restrictions already applying to investment-based crowdfunding to P2P platforms; and
- application of the rules under the Mortages Conduct of Business sourcebook (MCOB) and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
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 is seeking responses by 27 October 2018 and will publish the new rules in a Policy Statement later this year.