The Financial Conduct Authority (FCA) in the UK released a consultation paper outlining its proposed direction for consumer credit activities. This includes both loan-based crowdfunding (also known as peer-to-peer lending platforms) and investment-based crowdfunding. The consultation paper proposes a regulatory approach aimed at making the market more accessible, while ensuring that only investors who can understand and bear the risk participate in the market.

The consultation paper draws an important line between loan-based and investment-based crowdfunding, on the basis that loan-based crowdfunding activities are felt to be lower risk, and are therefore should be subject to a “lighter touch” regime. For loan-based crowdfunding, the FCA proposes to introduce a core set of requirements, including:

  • money management rules to minimize risk of loss,
  • minimum capital requirements,
  • dispute resolution rules, and
  • disclosure rules barring platforms from presenting promotional material to clients, if the material is not fair, not clear or is misleading.

The consultation paper also proposes to refine the existing investment-based crowdfunding regulatory scheme. Investors will be limited to the following categories:

  • sophisticated investors,
  • high net worth investors,
  • those who confirm before a promotion is made that they will receive investment advice, and
  • those who certify that they will not invest more than 10% of their portfolio in unlisted shares or unlisted debt securities.

In addition, if no advice is given, the FCA will expect firms to apply an appropriateness test to ensure that investors understand the risks involved.

The FCA is requesting comments on the consultation paper by December 19, 2013. It will consider feedback and publish the rules in a Policy Statement in early 2014.