The Financial Conduct Authority (FCA) is proposing new rules to regulate peer-to-peer lending and equity investment based crowdfunding platforms in a bid to offer better protection to investors, reports small business accountants Harris & Co.
The new regulations, which are open to consultation until 19 December 2013, apply to peer-to-peer lending and equity investment based crowdfunding, the two options in this area which require regulatory oversight, and are designed to provide clearer information to consumers using via this approach.
Consumers willing to lend money to companies via peer-to-peer crowdfunding platforms will receive explanations of the key features of the loans as standard, which must be clearly presented and avoid downplaying any risks. Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses. A 14 day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind.
New prudential requirements will also be phased in, with a minimum requirement set as either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher. The fixed minimum will be lower (£20,000) until April 2017, to allow platforms to acclimatise to the new regime.
For investment-based crowdfunding platforms, the FCA is proposing a number of changes to existing rules. The key proposals are that firms can only promote these platforms to sophisticated investors, high net worth investors, retail clients who receive regulated investment advice or investment management services from an authorised person; or to retail clients who certify that they will not invest more than 10% of their portfolio in unlisted shares or unlisted debt securities.
For non-advised clients, firms must assess appropriateness before allowing them to invest through the platform. The restrictions the FCA has placed on the marketing of unregulated collective investment schemes, or UCIS, will apply to platforms that offer these investments.
The FCA also warns that while most platforms will simply be providing an introduction to an investment, they will need to think carefully about whether any supporting information they provide (such as a star rating or ‘investment of the week’ award) amounts to advice, in which case they would need to apply for appropriate permission.
Christopher Woolard, the FCA’s director of policy, risk and research, said:
‘Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are. Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding.’
‘The consultation on the new rules is open until 19 December 2013 and comments can be made via the FCA website, click HERE’