Crowdfunding is a way in which people and particularly start-up businesses can raise finance through online portals (called crowdfunding platforms). In the UK some crowdfunding activity is unregulated, some is regulated and some is exempt from regulation.
The FCA is responsible for regulating:
- loan-based crowdfunding platforms, on which people lend money to individuals or businesses in the hope of a financial return in the form of interest payments and a repayment of capital over time (this excludes some business-to-business loans); and
- investment-based crowdfunding platforms, on which people invest in unlisted shares or debt securities issued by businesses.
In March 2014 the FCA set out rules for the above types of crowdfunding activity. The FCA has now published a report which looks at the implementation of the rules so far. The FCA will conduct a full post-implementation review of the rules in 2016.
When discussing the implementation of the rules the FCA mentions that it has identified a number of problems when conducting website reviews of investment-based platforms and loan-based crowdfunding. With regard to investment-based platforms the FCA has identified certain common issues which include:
- a lack of balance, where many benefits were emphasised without a prominent indication of risks;
- insufficient, omitted or the cherry-picking of information, leading to a potentially misleading or unrealistically optimistic impression of the investment; and
- downplaying of important information. For example, risk warnings being diminished by claims that no capital had been lost or the relevant risk warnings being less prominent than performance information.
The FCA’s review of loan-based crowdfunding found similar issues but also:
- promotions comparing crowdfunding investing to savings accounts and banking and, in doing so, creating the impression that the lender’s capital was secure;
- insufficient information in promotions about the taxation of investments;
- from the perspective of the borrower, the omission or lack of prominence of the representative annual percentage rate; and
- promotions having a lack of balance by giving prominence to the benefits of borrowing without a prominent indication of risk in relation to the borrower’s financial circumstances.
In the report the FCA also states that it will publish final guidance on social media and consumer communications in Q1 2015.
In the report the FCA looks at the investment aspects of loan-based crowdfunding. Where platforms arrange consumer credit, additional rules apply to protect borrowers. The FCA has committed to a separate post-implementation review of the consumer credit rules (including those applicable to loan-based crowdfunding platforms) and will publish further information on this in due course.