Typical: you wait years for proposals on regulating the crowdfunding industry and then two consultation papers come along at once.
What is crowdfunding?
Crowdfunding refers to the method of raising capital for a business or project via a large number of contributors who each contribute a small amount. Although crowdfunding is nothing new, the use of social media platforms as a way of facilitating crowdfunding has led to a rapid expansion of its use in recent years. In addition, as traditional sources of finance dried up after the financial crisis, crowdfunding offered a potential solution to help plug the resulting funding gap.
What is the Financial Conduct Authority (FCA) proposing?
In April 2014, the FCA will take over responsibility for the regulation of consumer credit. The proposals set out in its consultation paper on regulating crowdfunding are driven by a desire to protect consumers from the potential risks of contributing to investments in the relatively informal world of social media.
A number of the proposals are aimed at increasing transparency, so platform providers must ensure information about the platform is clearly presented and consumers are aware of whom they are dealing with. Communications must be presented in a way that consumers will understand and, in particular, platforms must not downplay risks or warnings.
Other FCA proposals are intended to protect consumers against potential financial instability in the funding platforms themselves. So platforms will be have to maintain financial resources of whichever is the higher of a percentage of funds loaned (starting at 0.3% of volume loaned up to £50m) and £50,000. In order to give platforms time to adjust to the new requirements, the fixed minimum will be reduced to £20,000 until April 2017. In addition, platforms must have resolution plans in place so that, if the platform collapses, loan repayments will continue to be collected and those lending to firms do not lose out.
What about the European proposals?
The aim of the European Commission’s consultation paper is to explore how EU measures could help to promote crowdfunding in Europe. They suggest a number of ‘soft law’ proposals including raising awareness of the existence of crowdfunding, allocating traditional public finance alongside crowdfunding and granting EU-wide access to platforms in order to increase the pool of potential crowd capital.
Both consultation papers close just before Christmas. Whilst any legislation at European level is likely to take some time, the FCA plans to have new rules in place next Spring.
Crowdfunding has taken on a greater significance in recent years, offering a funding lifeline to businesses unable to source capital through more traditional routes. It is hoped that any new regulations will strike an appropriate balance between protecting consumers and ensuring continued access to this innovative source of funding for those in need.
For more information email firstname.lastname@example.org.