The latest developments in the crowdfunding sector sum up rather neatly the British attitude to innovation and invention.
Within hours of an announcement last week from Funding Circle, now the biggest player in the UK crowdfunding sector, that it has raised $37m (£23m) for an assault on the US market from investors including Facebook backer Accel Partners and Twitter funder Union Square Ventures, the Financial Conduct Authority (FCA) was unveiling a new regulatory regime for the sector.
Peer-to-peer lending and investment is one of the very few technology innovations of the web 2.0 movement that Britain can claim as its own. The idea began in 2005 with the launch of Zopa, which offers savers the opportunity to lend to individual borrowers, but was subsequently picked up by firms who saw the potential for a lending service aimed at credit-starved small businesses in the wake of the financial crisis. Funding Circle alone has so far enabled small businesses to borrow more than £160m.
Crowdfunding platforms such as Crowdcube and Seedrs have subsequently set up in order to facilitate equity investments in small businesses from the crowd. There are now a proliferating number of variations.
In fairness to the FCA, the crowdfunding sector itself has been a long-time advocate of closer regulatory scrutiny. It reasons regulation will give it credibility with a much wider investment public while also, hopefully, keeping out cowboy operators.
Nevertheless, the juxtaposition of Funding Circle’s exciting announcement – a British success story to be celebrated – with the FCA’s rulebook launch was striking. For there is a danger that parts of the new regulatory regime will cause significant damage to the sector. That threat exists even in the lending sector of the industry although the new requirements are mostly about the information given to lenders. The sting in the tail is the additional capital the services will be required to hold in order to protect lenders in the event of a platform going under. The intention is noble enough, but why not just insist on segregated accounts to keep customers’ money safe? And if they are to be regulated, why not include these sites within the safety net of the Financial Services Compensation Scheme, which would give potential lenders peace of mind?
However, it is the equity-based crowdfunding services that will be hit hardest by the FCA’s approach. It intends to ban the promotion of services to all but sophisticated or high-net-worth retail investors, or to those who promise they have taken independent advice or are not investing more than 10 per cent of their savings.
What the FCA is effectively saying is that investment in the stock of a company via a crowdfunding website is too high-risk for most small investors. The problems with that are twofold. First, it isn’t the FCA’s job to tell people what they should or shouldn’t invest in. And second, the regulator’s approach is inconsistent.
The FCA is absolutely entitled to make sure savers and investors are always given crystal clear information about risks. That’s the right approach, rather than a nanny-state rule that decides on people’s behalf an investment is too risky for them. Other routes into equity investment in high-risk, unlisted businesses are not similarly restricted. The crowdfunding sector will survive the threat, but this is an unwelcome intervention.