FCA launches crackdown on crowdfunding

The Financial Conduct Authority (FCA) has called for tougher rules to protect investors who use crowdfunding and peer-to peer (P2P) websites.

The FCA found that 'it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings'.

It also found that 'it is difficult for investors to assess the risks and returns of investing on a platform' and that marketing material does not always meet their requirement to be 'clear, fair and not misleading'.

The FCA therefore said that it is consulting on whether mortgage-lending standards should be extended to loan-based platforms.

STRENGTHENING INVESTOR PROTECTION

Andrew Bailey, chief executive of the FCA, says: 'Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers.

'Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.'

Both crowdfunding and P2P have exploded in popularity over the past couple of years, in part driven by savings rates falling to historic lows.

In P2P lending an investor lends money to borrowers who pay interest and return the capital at the end of the term. The exchange is made through online platforms, such as RateSetter and Zopa, some of which only lend to individuals, while others lend to small businesses or both.

Crowdfunding websites are a different beast, with platforms such as Crowdcube and Seedrs allowing the public to buy equity or lend money to a start-up.

It is early days, but so far there have only been five profitable exits, according to AltFi Data, out of 751 crowdfunding companies. It is important to note that many of these start-ups fail.

The FCA said it planned to consult in 2017 to introduce new rules to address the problems it had found with both crowdfunding and P2P.

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