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How will the FCA regulation affect the investor?
Welcome to first post written by Tom Hayward from FundingKnight, a peer to business lender who arrange crowdlending for businesses.
It’s been common knowledge for some time now that the crowdfunding industry is soon to become regulated. We look at how this ruling will impact those who invest their money in British businesses across these platforms as the industries regulator releases a telling policy statement.
On Wednesday (6th March) the regulator published this 95 page policy statement – The FCA’s regulatory approach to crowdfunding (similar activities) - to outline the new regime that will apply to internet P2P and P2B platforms.
The UK’s Financial Conduct Authority (FCA) has said that as of April 1st 2014 crowdlending platforms will be need to hold a sum of capital in reserve to mitigate against the risk of failure which could potentially leave lenders out of pocket.
Reaction from the industry
The recent announcement sparked mixed emotions amongst the ‘crowd’ however it seems in the main that the regulation will serve to protect the investor and stem the flow of cash from small savers towards crowdlending platforms.
The so-called 10% rule has prompted much discussion as it’s viewed that the stipulation could prove a deterrent for small investors who typically use their disposable income to participate in crowdfunding. The pre-mentioned ruling restricts new investors to spending no more than 10% of their assets (excluding homes and pensions) during a 12 month period.
It’s worth noting however that this rule only affects equity based crowdfunding companies rather than more secure P2B lending platforms, such as FundingKnight, who facilitate loans from consumers (or peers) to businesses.
What the experts said
Chief Executive of FundingKnight, Graeme Marshall feels says “I've always supported appropriate regulation for the industry. Clearly we need regulation to cover the spectrum of crowdfunding, recognising the differences in level of risk between equity crowdfunding and crowdlending. The FCA has listened carefully to the industry and the "light touch" rules they are proposing for the crowdlending sector feel about right.”
Chris Woolard, director of policy, risk and research at the FCA, said: “We’re trying the make sure consumers are properly informed and have real clarity about the investments they are getting into.”
The FCA will ensure that crowdlending platforms provide clear information regarding the risks involved in using such services, another measure to safeguard the consumer from potential confusion or misuse.
The key message coming from the FCA is that loan-based platforms must be transparent in communicating information about prospective borrowers to give lenders the best chance of fully assessing the risk before depositing funds. Companies must also ensure there is a contingency plan in place to ensure that loan repayments continue in the event of borrower complications. It’s likely that capital requirements will be set to help in this scenario.
The new rules from the FCA come into place on 1st April 2014, subject to transitional arrangements. In 2016 they will revisit the rules to make any further changes if they’re required.
The FCA offer a great deal of information on the regulation and crowdfunding.
Want to start lending to British businesses? Register now to invest with FundingKnight.