In April 2014, the FCA acquired responsibility for consumer credit regulation in the UK. As part of this transfer, the FCA introduced new rules for the regulation of loan-based crowdfunding platforms operated by firms authorised by the regulator. At the time the FCA committed to carrying out a full post-implementation review of the crowdfunding market and regulatory framework in 2016 in order to identify whether further changes were needed.
The FCA has now issued a Call for Input to the post implementation review of its crowdfunding rules (Call for Input). The Call for Input is the FCA’s first step in its post implementation review and over the coming months will be conducting work with firms to collect evidence on potential risks and address any knowledge gaps. The FCA will also carry out additional research into the market as a whole to inform the review.
In terms of the loan-based crowdfunding (also commonly known as peer-to-peer (P2P) and peer-to-business) sector the FCA notes that:
- one merging feature of platforms is a broader pooling of credit risk. The pooling and other factors may mean that some firms operating loan-based crowdfunding platforms may also be operating collective investment schemes. While this development may benefit investors, there are potentially blurred lines between loan-based crowdfunding and other business models, such as asset management. The FCA wishes to explore this issue further and understand to what extent loan-based crowdfunding is becoming a substitute for asset management;
- the FCA is seeing the development of maturity mis-match products on platforms. In some wats these investment products look similar to a 30-day savings account. The FCA believes that theis development leads to questions over the extent to which loan-based crowdfunding platforms allow for regulatory arbitrage with banking business, without being subject to the same consumer protection requirements, or whether the way they describe their business models or the products on offer could be misleading to consumers;
- there appears to be an evolution in the types of investors on loan-based crowdfunding platforms. The FCA is keen to explore the implications of this trend in more detail and notes that it would be concerned if institutional investors are being granted any favourable treatment in investing compared to less experienced retail investors;
- there are questions in relation to the position of borrowers under consumer credit agreements or mortgage contracts on P2P platforms;
- some P2P platforms are considering moving into residential secured lending. The FCA is proposing to apply ‘usual’ MCOB in such circumstances; and
- it has some potential concerns about how firms are presenting information to investors. It gives the example that it is quite difficult to find clear information on default rates on platform websites or to understand how the likelihood of default differs depending on when the loan was originated. The FCA is planning additional work in the coming months to review disclosure standards.
The FCA is considering a range of options for the proper regulation of this developing market. Interestingly, the regulator is seeking views on the application of current consumer credit regulation to lender (including the distinction between ‘commercial’ agreements and ‘non-commercial’ agreements under the CCA 1974), and the regulatory requirements incumbent on platforms themselves (i.e. under CONC). The FCA has already embarked on its consultation with respect to possible future amendments to the CCA 1974; and this Call for Input represents a significant opportunity for market participants to identify the operationally challenging areas of the current framework.
In terms of the investment-based crowdfunding the FCA notes that:
- some of the trends seen for loan-based crowdfunding are also visible in investment-based crowdfunding (for example increasing institutional investment on the platforms);
- it will be conducting further analysis into the due diligence processes employed by platforms and the additional analysis undertaken by investors. The FCA states that if it finds that investors are not in a position to protect their own interests it may consider the feasibility of minimum due diligence standards. For example, it could consider requiring business plans to be reviewed by an appropriate third party;
- it is planning an in-depth assessment of how firms operating investment-based crowdfunding platforms are meeting the appropriateness test and whether the client outcomes are fair; and
- it plans to assess how well firms are meeting the client classification requirements and on what basis they are making assessments about whether clients meet the specified criteria.
The deadline for responding to the Call for Input is 8 September 2016. This review is an important development for firms in both the loan-based and equity based crowdfunding arenas. Firms should use this opportunity to engage with the regulator, to develop the shape of this dynamic sector.