Investment risks prompt new crowdfunding rules

THE UK Financial Conduct Authority has said it is considering new rules governing the crowdfunding industry, after finding firms fell short of providing fair and transparent offerings to investors.

It’s “difficult” for investors to assess the risks and returns of investing on crowdfunding platforms that arrange loans or equity investments, the FCA said on Friday in a statement on its website, following a fivemonth review of the industry.

The financial regulator also said that some peer-to-peer firms did not comply with requirements to be “clear, fair, and not misleading” in their promotions. The agency did not name specific companies.

The report comes as both sides of the crowdfunding industry – peer-to-peer lending and equity investing platforms – enjoy surging growth in Britain. Monthly origination from peer-to-peer lenders is on course to exceed a record £1 billion in the fourth quarter, while equity crowdfunders will issue more than £120 million for small companies in 2016, a five-fold jump from 2013, according to AltFi Data Ltd.

Andrew Bailey, the FCA’s chief executive, said the industry was evolving at such a rapid pace that some platforms were becoming too complicated for investors to understand. Bailey said he’s concerned this approach may lead investors to believe their investments will be guaranteed not to lose money, a claim prohibited by FCA rules.

“We’ve seen some of that, and don’t want to paint everyone with the same brush, but we are going to subject these provision funds to scrutiny,” Bailey said in an interview.

The FCA concluded that some platforms were not sufficiently managing the risks or conflicts of interest in their operating models and that some peer-to-peer lending firms had inadequate plans for winding down their operations if they failed due to defaults.

The Peer-to-Peer Finance Association, a London-based trade group, said it welcomed the FCA’s report.

Online lenders have arranged a cumulative £6.5bn since 2009, making Britain the world’s No. 3 market after China and the US.

– Bloomberg