Back in October 2013 we reported on proposals put forward by both the Financial Conduct Authority (FCA) and the European Commission for regulating the crowdfunding industry. The FCA has recently issued a policy statement confirming that many of the proposals from its original consultation paper will now be implemented with effect from 1 April 2014. Anyone involved in the crowdfunding industry risks looking foolish if they fail to comply with the new proposals by that date.
Loan based crowdfunding (often known as P2P lending) refers to firms operating peer-to-peer or peer-to-business lending platforms. The FCA Principles contained in the FCA Handbook will be extended to apply to firms running P2P lending platforms. As a result such firms will be subject to conduct of business rules, including provisions in relation to disclosure and promotions, client money protection rules and dispute resolution rules.
Firms will also be subject to minimum capital requirements but the FCA has changed the element of this requirement that will be calculated as a percentage of funds loaned, by slightly reducing the percentages and introducing an additional layer for very large firms. According to the FCA, these tweaks will result in some firms being subject to a lower capital requirement. During the transitional period (1 April 2014 to 31 March 2017) the requirement will be whichever is the higher of £20,000 and a percentage of funds loaned (tapering from 0.2% of the first £50m loaned to 0.05% for funds loaned in excess of £500m). From 1 April 2017 the minimum requirement will increase to £50,000.
The FCA will also require firms to take reasonable steps to have arrangements in place so that, if the platform fails, loans will continue to be administered. Money held by a failed platform will be returned only to relevant investors.
Investment based crowdfunding
Investment based crowdfunding involves companies raising funds by issuing shares or debt securities. Here, the FCA has broadly kept to its original proposals, although it has (helpfully) confirmed that the regime will only apply to ‘non-readily realisable securities’ and therefore will not apply to securities which are traded on a recognised investment exchange such as AIM.
Firms offering equity investments on crowdfunding platforms will only be able to promote these to certain limited types of investor. For retail clients who are not certified as sophisticated or high net worth individuals, they will either need to be advised or else confirm that they will not invest more than 10% of their net investible assets in these products. In addition, where a retail client is not advised, the firm will need to check that the client has the knowledge or experience to understand the risks involved with the investments.
“The crowd think it’s all over…”
The FCA’s rules will come into force on 1 April 2014, subject to certain transitional arrangements. The implementation and impact of the rules will be reviewed by the end of the year.
But that’s not it for the crowdfunding industry: more regulation could follow once the European Commission responds to its own consultation paper on regulating crowdfunding.
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