It is difficult for investors to compare loan-based and investment-based crowdfunding platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings, the Financial Conduct Authority (FCA) says.
The regulator also says it is difficult for investors to assess the risks and returns of investing on a platform.
The FCA has given an update on the post-implementation review of the loan-based and investment-based crowdfunding market.
The FCA’s earlier call for input raised a number of issues for discussion and the statement provides a first response to the feedback received and sets out the next steps.
Based on a review of the feedback received, issues seen during the supervision of crowdfunding platforms currently trading and consideration of applications from firms seeking full authorisation, the FCA believes it is appropriate to modify a number of rules for the market.
It says financial promotions do not always meet FCA requirement to be ‘clear, fair and not misleading’ and the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.
In the loan-based crowdfunding market in particular, the FCA is concerned that certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors, and the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity.
The FCA has also challenged some firms to improve their client money handling standards.
The FCA plans to consult on additional rules in a number of areas. These include more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms.
For loan-based crowdfunding, the FCA also intends to consult on strengthening rules on wind-down plans; additional requirements or restrictions on cross-platform investment; and extending mortgage-lending standards to loan-based platforms.
The FCA’s current rules on loan-based and investment-based crowdfunding platforms came into force in April 2014. They aimed to create a proportionate regulatory framework that provided adequate investor protection whilst allowing for innovation and growth in the market.
Andrew Bailey, chief executive of the FCA, says: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers. Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”