Belfast Telegraph

UK Website Of The Year

Crowdfunding sector to be reviewed by Financial Conduct Authority

Published 08/07/2016

In 2015, an estimated £2.7 billion was invested through regulated crowdfunding
In 2015, an estimated £2.7 billion was invested through regulated crowdfunding

The fast-growing crowdfunding sector is being probed by the City regulator to make sure consumers understand the risks.

Within the crowdfunding sector, the Financial Conduct Authority (FCA) regulates peer-to-peer (P2P) lending websites, which match up people with some cash to lend with people or businesses who want to borrow, as well as investment-based websites, on which people may invest in unlisted shares.

The sector has ballooned in recent years. In 2015, an estimated £2.7 billion was invested through regulated crowdfunding, up from £500 million in 2013.

The returns on offer on such websites can be much more attractive in the low-interest environment that someone could expect to get from a traditional savings account on the high street. But the risk to consumers of losing their cash can also be greater - as savers' money does not have the same protections that it would get in a bank.

Savers have the protection of the Financial Services Compensation Scheme (FSCS) if their bank or building society goes bust.

As crowdfunding has become more of an established way of raising money, the FCA is considering whether the rules need to be changed to reflect its current scale and status and the risks to investors, or whether the current regime deals adequately with the risks.

The FCA is seeking views by September 8 on which areas should be considered as part of an upcoming review into rules around crowdfunding.

It wants to know whether financial promotions are still appropriate for the way the market has developed and whether P2P websites should be required to assess investor knowledge or experience of the risks involved.

In an interview played on the BBC's Today programme earlier this year, Lord Adair Turner, a former chairman of the Financial Services Authority, issued a warning about the fledgling P2P industry - predicting losses which will ''make the worst bankers look like absolute lending geniuses''.

His comments were strongly rebutted by P2P lenders, which said they flew in the face of the evidence.

The FCA does not regulate crowdfunding websites where people donate money to a good cause, with no expectation that they will get any money back.

Christopher Woolard, director of strategy and competition at the FCA said:"T he market has grown rapidly and we want to explore concerns that have been expressed about developments in some aspects of the market.

"We believe now is the right time to consider whether our requirements remain appropriate and that we have the right rules to support the development of this dynamic market by ensuring consumers are adequately protected."

Rhydian Lewis, CEO and co-founder of P2P lender RateSetter, said: "Peer-to-peer investing is becoming very popular and it makes sense for the FCA to ensure it is appropriately regulated. We look forward to continuing our active and positive engagement with the FCA during the review process."

Christine Farnish, chair of industry body the Peer-to-Peer Finance Association, said: " The challenge for this review will be to make sure that the regulatory regime develops in a way that focuses on the risks to consumers, and any risks to the wider financial system, of peer-to-peer lending.

"If platforms are to continue to be able to compete with powerful, large incumbents, then the regulator must strike the right balance and ensure that regulation is proportionate to the risks posed."

Read More