On 15 January 2024, the FCA published a portfolio letter addressed to investment based crowdfunding (IBCF) platforms.
The letter outlines the harms to consumers and markets most likely to arise from crowdfunding business models and the FCA’s strategy to address those harms. Boards should consider whether the risks of harm below are present in their firm and adopt strategies for mitigating them.
In future supervisory engagements, the FCA will consider whether the Board and Senior Managers have taken appropriate action to ensure that consumers and markets are adequately protected from these harms.
Key areas of focus for IBCF firms
In the letter, the FCA highlights the following key areas of focus:
Policy Statement PS22/10
PS22/10 set out the FCA’s strengthening of financial rules for high-risk investments and firms approving financial promotions. A key feature of PS22/10 was to improve the customer journey into high-risk investments through strengthening risk warnings, banning inducements to invest, introducing positive frictions including a cooling-off period, and improving client categorisation and appropriateness testing. The FCA notes in the letter that following a review, it found the level of compliance by P2P and IBCF firms was far below the standard it expects. It flags that it expects all firms to review its findings, including its good and poor practice examples, and make any changes required to meet expectations and improve consumer outcomes. If the FCA finds weaknesses or failings that demonstrate potential or actual harm to investors, it will intervene and ensure that redress is put in place.
Trading Venue Perimeter Guidance
The FCA’s PS23/11 set out guidance on the trading venue perimeter, and a related letter to firms provided further clarity on when firms may be operating a multilateral system and hence require authorisation as a training venue. The FCA notes in the letter that it expects all firms to monitor how they operate ‘bulletin boards’ and secondary markets to ensure that they do not cross the demarcation between these and a multilateral system.
Gateway for firms approving financial promotions
In PS23/13, the FCA introduced a gateway for firms who approve financial promotions. The FCA reminds firms that they must apply for permission to approve financial promotions before 6 February 2024 to take advantage of the transitional arrangements. The FCA notes that in recent months it has intervened to prevent a firm from approving the content of any financial promotion for a qualifying cryptoasset for communication by an unauthorised person.
Public Offer Platform
The FCA highlights its Engagement Paper 5, published in July 2023, on the Public Offer Platform, which will be of interest to operators of crowdfunding platforms. The regime will allow the FCA to set specific rules for types of public offers of securities that are not admitted to a public market. The FCA is currently considering feedback to the Engagement Paper and will be consulting on draft rules later in the year. It notes that it is keen to make sure the framework provides investors with sufficient information to assess the benefits and risks of investing in securities offered outside of public markets, and that platform operators undertake appropriate due diligence to prevent fraud. Under the Public Offer Platform regime, the FCA plans to expand the opportunities available to retail investors, where they can invest with confidence, understand the risks they are taking and the regulatory protections that are provided.
The letter reminds firms that the Consumer Duty came into effect on 31 July 2023. This will be a key focus in how the FCA supervises firms in the IBCF portfolio.
The FCA expects firms to have implemented the Consumer Duty in full, and it explains that its supervisory focus aligns with the Consumer Duty outcomes:
- Consumer understanding: Firms need to ensure that investors fully understand all aspects of the investment they are making and are fully aware of the extent of due diligence undertaken by the platform.
- Products and services: Firms need to apply an appropriate level of due diligence in relation to the securities they distribute before marketing such securities to investors.
- Price and value: Fees and charges, to investors and fundraisers, need to be transparent and fair, and firms need to have asked themselves how price and value outcomes apply to them.
- Consumer support: Firms need to provide support that meets their consumers’ needs, including those with characteristics of vulnerability, throughout the life of the product or service.
The letter notes that data from submitted regulatory returns indicates financial resilience is a real issue facing firms in the crowdfunding portfolio. As such, the FCA will undertake greater scrutiny of firms’ financial performance and ensure that firms take steps to strengthen capital and liquid resources where it considers necessary.
All firms are expected to identify absolute minimum levels of liquid and capital resources which, if breached, will trigger a wind-down. Firms should monitor their financial health as part of appropriate systems and controls and always maintain adequate financial resources. The FCA will continue to ask firms for their wind-down plans through its supervisory work, and where it deems necessary it will require an injection of capital and consider whether it is still appropriate to continue with new fundraises on behalf of issuers.
The FCA reminds Boards that they are responsible for the governance and oversight in ensuring their firm meets its regulatory requirements and expectations set out in the letter. Firms should take all necessary actions to ensure that senior managers are accountable for delivering on this.