Crowdfunding is a term used to describe new ways in which people and businesses can raise finance. Whilst the regulator is keen to support innovation in the market, they also remain concerned about potential customer detriment which brings some interesting compliance challenges for firms. P2P
P2P and Investment Crowdfunding explained
There are two main types of regulated crowdfunding:
- Investment-based crowdfunding – Investors invest in exchange for a number of shares or debentures. The investor hopes to make a return with the company on exiting. This can include a trade sale, an IPO or a share buyback.
- Loan-based crowdfunding – Also called peer-to-peer (P2P) lending. Investors lend money, (normally to individuals or business borrowers) in the expectation of a financial return through interest payments and the repayment of capital over time.
Crowdfunding platforms may offer higher returns than those available from other financial products, though there are usually greater risks. Any firm wishing to undertake regulated crowdfunding must be authorised. The authorisation process can be complex and firms should expect a good level of scrutiny from the regulator. Some of the key requirements are that firms:
- Draft a detailed regulatory business plan setting out their planned activities, budget and resources;
- Have a detailed understanding of the regulated activities they will undertake and the compliance requirements;
- Have staff who have adequate knowledge and experience of regulation;
- Have adequate financial resources; and
- Have a website which is at a fairly advanced stage of development – the FCA may ask for a demonstration of how it works.
Key areas of focus
There are a myriad of different business models currently operating in this sector with a steady flow of new variations joining all the time. Firms operating in this sector have a difficult job in managing the risks which these complex business models present and ensuring they also meet the regulator’s expectations for the fair treatment of customers.
Having carried out a review of the crowdfunding market, the FCA has most recently published a Consultation Paper which proposes significant reforms. They have identified a range of potential and actual harms for the investor, borrower and the platform which they want to mitigate. Whilst they wish to support an innovative and rapidly expanding sector their ultimate objective is to deliver consumer protection and firms are now going to have to work much harder to meet the proposed requirements. For example:
- They want to ensure investors are provided with clear and accurate information about the risks associated with the product, especially if there are several variants to choose from;
- They want to ensure home finance borrowers have a similar level of protection to that they would have if the provider was authorised; and
- For platforms they want robust and effective governance arrangements and a deep understanding of risk and pricing.
The consultation has now closed and we are expecting new rules to be published in Q2 2019.
Firms therefore cannot take their foot off the pedal once authorised. We have experience in the crowdfunding/P2P market and are well placed to help you both understand what is required, test that you are meeting the current requirements and help you understand the potential impact of the latest proposals.