The Financial Conduct Authority (FCA) has provided an update on its post-implementation review of the loan- and investment-based crowdfunding market. Its initial findings suggest the industry’s hitherto light touch regulatory framework may change.
Chief among the concerns raised by the FCA are inadequate risk and loan performance disclosures, with some firms acting in a non-transparent manner in order to maintain confidence in loan-based crowdfunding. This in turn exposes investors to risks – as does firms developing new products and expanding into unfamiliar markets in a bid to increase market share despite lacking the necessary experience. Meanwhile some platforms feature loans originated on different platforms, which is not always made clear to investors.
These issues paint a different picture of an industry that has to date enjoyed a relatively harmonious relationship with the regulator. Many crowdfunding platforms in the UK have taken a different approach to their US counterparts, preferring to rely more on the “crowd” element rather than institutional investors and appeal more to savers with a higher risk appetite rather than hard-nosed investors.
But accusations of misrepresenting loan performance could be damaging. As per our Global Savings Account Analytics 2016, only 7% of consumers were “very willing” to lend their savings through a crowdfunding platform, while 36% were “very unwilling.” One of the key reasons for this unwillingness is that 29% “strongly agreed” with the statement “I don’t want to use a lender that does not have an established reputation.” Clearly trust is an integral part of any financial relationship, which findings such as the FCA’s could potentially break.
The other significant point raised above is the negative view taken by the regulator of attempts by platforms to branch out and achieve much-needed scale. Despite their lower operating costs, many (if not all) have struggled to make a profit. The larger, more established crowdfunding platforms have pursued a strategy of synergistic partnerships with other companies in different sectors that are mutually beneficial. The language used by the FCA suggests that rapidly expanding into different sectors has not been properly thought out in terms of risk exposure.
The interim review was met by a strong rebuke from the UK Crowdfunding Association, whose spokesman Bruce Davis said that if existing rules were enforced “then a lot of these problems wouldn’t be there.” Davis’ comment makes reference to the light touch regulatory framework UK crowdfunders currently operate within.
Yet while the views of the FCA indicate that tighter regulation may be on its way, it is preferable that irregularities are exposed and corrected now and not following the financial collapse of a platform. Furthermore, the UK’s regulatory framework of this industry has been recognized across the globe, so it is unlikely we will see heavy-handed regulation that quashes a new and growing source of credit that is helping drive the growth of SMEs and consumer spending.
By Sean Harrison, Retail Banking Analyst