The Chairman of the Treasury Select Committee (TSC), Andrew Tyrie MP, has written to the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) about crowdfunding. Although he doesn’t say so in terms, Tyrie almost certainly had the recent collapse of two crowdfunded UK companies in mind, when he put pen to paper.
Tyrie’s letter to the FCA seems straightforward enough, if the references to “crowdfunding” are taken to include peer-to-peer (P2P) lending as well:
“[Please] examine [some] issues … and … set out the FCA’s approach to the risks and opportunities afford[ed] in the growth of [crowdfunding] and related sectors.
- Where does the responsibility lie for ensuring that information is conveyed to potential investors through crowdfunding platforms?
- Are sufficient incentives placed on crowdfunding platforms accurately to assess the creditworthiness of borrowers and firms seeking investment through crowdfunding platforms?
- What is the FCA’s assessment of consumers’ understanding of the level of risk associated with the investment opportunities offered through crowdfunding platforms?
- To date, what impact has the growth of crowdfunding made on competition within the financial sector and what is the likely impact should the growth continue?”
However, the issues are complex, and the FCA’s answers could easily increase the pressure for regulatory change. For example:
- the answers to the first two questions are likely to emphasize the tensions that almost always exist, from a commercial, legal and regulatory perspective, when a company uses a crowdfunding platform to raise a modest amount of capital; the platform operator’s fees are low, and its margins are lower still; and the investor risks are almost routinely high, at least where unlisted equity investments are concerned; and
- the answers to the second two questions will only serve to emphasize the nature and extent of these tensions, if the FCA explains that:
- most consumers still have a poor understanding of the risks associated with crowdfunding investments of all kinds;
- the more detailed and bespoke risk disclosure and fact verification that some commentators are calling for, will be expensive, and unlikely to help many consumer investors; and
- increased crowdfunding activity with some consumer involvement is arguably both necessary and desirable, if we want to encourage competition in the financial services sector, and innovation elsewhere.
Tyrie’s letter to the PRA is rather more difficult to understand:
- “What is the PRA’s assessment of the crowdfunding sector’s resilience to potential economic shocks?
- What have been the prudential impact of the financial sector’s increased exposure to unsecured loans through crowdfunding platforms and what may these be in the future, if the current growth rate persists?“
This letter is addressed to Andrew Bailey, so one reasonable answer might be “I’ll take this with me to the FCA, and answer it from there” because crowdfunding and P2P lending platforms are prudentially regulated by the FCA; and the PRA and Bank of England are unlikely to have any interest in them from a financial stability perspective now, or over the medium term.
But, perhaps Tyrie is getting at something else. For example:
- regulated financial institutions provide between 25% and 33% of the capital that’s invested through crowdfunding and P2P lending platforms today. How badly would a bank, insurer or asset manager suffer, prudentially, if a platform operator failed, and the crowdfunded investments all turned sour at once? The answer’s probably “not much” because, for most regulated institutions, their crowdfunding investments will be modest (in absolute and proportionate terms) and well spread. And the existing capital rules are likely to mean that this state of affairs will continue indefinitely. We’ll see;
- if there was a severe economic shock, and large numbers of consumers lost a material proportion of their savings because platforms failed, and their crowdfunded investments turned sour, would that be enough to damage the UK’s economy, in and of itself? Even this seems unlikely, given (a) the aggregate value of the investments concerned (when compared with the aggregate value of consumers’ other savings and investments), and (b) the FCA’s existing crowdfunding conduct of business rules.
Perhaps the answers to these questions are less obvious than they seem. This would at least explain why Tryie is asking the PRA for comments on crowdfunding and P2P lending issues, when they’re entirely regulated by the FCA (for now, at least).
The TSC Press Release, which accompanies the publication of Tyrie’s letters, may open another can of worms entirely, but that’s for another day.
(The Nesta / University of Cambridge Judge Business School report, “Pushing Boundaries / The 2015 UK Alternative Finance Industry Report” of February 2016, offers some invaluable insights into the size and growth rates of the various parts of the UK #AltFin landscape, and should perhaps be required reading for all #AltFin academics and practitioners. Either way, it’s available here.)