FCA to consult on tighter rules for crowd-funded loans

Regulators are launching a consultation into rules for loan-based crowdfunding platforms amid concerns that some business models are too complex and do not offer adequate protection for lenders

The Financial Conduct Authority (FCA) is proposing to address the ways in which the loan-based crowdfunding model has developed since the it last reviewed the sector in December 2016. The FCA says some loan-based crowdfunding business model have become increasingly complex.

The three-month consultation period will culminate in publication of proposed rules in a FCA policy statement later this year.

Based on its findings the FCA is now inviting responses to a number of specific proposals to change the rules for loan-based firms which cover:

•             proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved;

•             ensure investors are adequately remunerated for the risk they are taking;

•             transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors;

•             promote good governance and orderly business practices; and

•             proposals to extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms.

In December 2016, the FCA also committed to addressing a potential gap in protections for customers buying a mortgage or taking out a home finance product through loan-based crowdfunding and it is now proposing to apply rules which would normally apply to home finance providers to peer-to-peer (P2P) platforms where at least one of the investors is not an authorised home finance provider.

‘By contrast, for investment-based crowdfunding platforms, detailed regulatory obligations already exist to manage the risk of investment business, typically under Markets in Financial Instruments Directive or Alternative Investment Fund Managers Directive, and in the FCA Handbook,’ said the FCA in a statement.

The FCA has also observed some poor practice by some firms in the crowdfunding sector, particularly among loan-based platforms. This has arisen as a result of both poor business practice as well as risks around certain business models. Proposals in this consultation seek to improve standards in the sector but in a way that leaves scope for further innovation.

Christopher Woolard, executive director of strategy and competition at the FCA said: 'When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it is essential that regulation stays up to date as markets develop. The changes we a\e proposing are about ensuring sustainable development of the market and appropriate consumer protections.'  

The closing date for feedback to the consultation is 27 October 2018.

​​​FCA CP18/20 Loan-based (peer-to-peer) and investment-based crowdfunding platforms: Feedback on FCA post-implementation review and proposed changes to the regulatory framework: open consultation issued 27 July 2018

Report by Rob Munro

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