Last week the FCA published its eagerly awaited consultation paper on crowdfunding following the implementation review launched in 2016. The document addresses proposed regulation for both investment-based and loan-based crowdfunding (P2P lending), further recognising crowdfunding as an important alternative source of finance for both companies and consumers.
The regulator focuses on risks arising from both the exposure to the underlying assets that are created as well as the complexity of the investments offered, emphasizing that these risks need to be adequately managed and understood. It has expressed concerns about platforms not always communicating to investors the true nature and risk of the investments they are exposed to.
The FCA therefore proposes to set out the minimum information that P2P platforms need to provide to investors to facilitate clearer disclosure about investments, charges and risk. While a number of platform lenders already provide such information, there are some that are “lacking robust systems and controls in place and will have to make appropriate changes to fulfill the proposed requirements”.
The consultation paper addresses the fact that the crowdfunding industry is yet to go through the full credit cycle, with losses on loans likely increasing in tighter economic conditions and P2P business models being tested.
Overall, main review findings include poor communication and marketing materials on behalf of the platforms (particularly inadequate explanation of risks, not having appropriate systems and controls to support the required disclosure as well as opaque charging structures) and inadequate risk management to support advertised outcomes, fair valuations and fair pricing (specifically pricing at origination, ongoing valuations and achieving target rates).
The proposed changes pertaining to loan-based crowdfunding include:
- strengthening and clarifying the existing P2P requirements and standards to improve investor protection and provide greater certainty on what to expect from P2P platforms;
- adding more detailed requirements to address the specific nature of some services offered by P2P platforms;
- bringing P2P platforms’ governance more in line with the systems and controls requirements that apply to firms conducting certain types of investment business (dealing as agent) and with investment managers;
- limiting P2P platforms’ ability to market to certain investors to limit the potential overexposure and losses;
- further guidance on wind down arrangements in practice;
- adding a number of detailed requirements on the disclosures provided to investors (the role of the platform, investment information, outcomes statement within 4 months of the end of each financial year outlining the expected and actual default rates, summary of assumptions used in determining expected future default rates and actual returns achieved);
- additional disclosures where contingency funds are in place; and
- a commencement period for the new rules: 6 months from publication of the final rules and Policy Statement.
We at Alterest support initiatives enabling sustained, responsible growth in the alternative lending markets and raising the profile of the industry. We therefore welcome the proposed changes with the caveat that they should be implemented in a balanced manner as to not stifle further innovation in the sector.
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