14th October 2015
Historically, regulators have been viewed as being a burden to smaller businesses and new markets by forcing stringent regulation that is not suitable in design. However, the growing popularity of P2P lending (1100% growth since 2012) and equity crowdfunding (410% growth year on year 2012), is in part thanks to the forward thinking nature of the FCA, the main regulator in the UK, to adopt new processes for this disruptive, growing and valuable sector. This is demonstrated with their ‘Project Innovate’. Project Innovate supports the development of new financial products and services by providing innovator businesses with a dedicated team of support who understand the regulatory framework and how it applies to them.
The FCA’s main role is to protect consumers in their dealings with financial services companies. In comparison to incumbents, the crowdfunding and AltFin sector at large, are new and disruptive by their very nature, because of this the FCA have also developed a ‘small firm response’ team to work, in what we believe to be, a more collaborative and effective way of working with smaller firms.
It is encouraging that the FCA recognises that P2P lending and equity crowdfunding platforms can help consumers make financial returns, and can help aid the growth of the economy.
When you invest or lend money through a platform that is directly regulated by the FCA, it helps you, as a consumer to be more protected. Firms that are regulated are required to ensure that financial promotions (or any investment opportunity listed on a platform) are fair, not misleading and clear. This means that all promotions should be communicated in a balanced way both communicating the pros and cons of an investment opportunity.
One of the ways the FCA ensures consumers are aware of the risks of P2P lending and equity crowdfunding platforms is by making them include the phrase ‘Your capital is at risk,’ prominently on a number of different pages. The FCA requirement to do this is important because such platforms do not allow consumers to have access to the Financial Services Compensation Scheme, a fund which acts as a last resort for customers of authorised financial services firms. The Financial Service Compensation Scheme protects up to £80,000 of consumers savings when in a savings account. A crowdfunding investment is different to a savings account and your capital is at risk in a similar way to any other investment that is not protected by this scheme.
Another element of compliance for FCA regulated platforms, is having to provide regular reporting on performance. Additionally, platforms are required to have a minimum capital requirement, meaning that even if the platforms fails, investors and lenders will be protected to receive funds that are due to be repaid. These tend to be ring-fenced within separate bank accounts.
FCA regulation includes the requirement for platforms to operate within a robust framework and to abide to a number of compliance and security standards and checks.
At Crowd2Fund, we aim to conform to the FCA standards as an absolute minimum requirement. Our internal operational procedures include conducting rigorous due diligence checks on companies, holistic credit referencing, KYC checks on investors and clients, IT system controls, staff compliance training, anti money laundering procedures which includes ID checks for users, security procedures, fraud policies and the implementation of multiple company policies and ethics to ensure the company is operating within the permissions granted by the FCA.
Crowd2Fund have also partnered with a well respected pan European company called Mangopay. All client funds are segregated and administrated by Mangopay via the Crowd2Fund system for added safety. Mangopay are regulated separately by the European Commission. Working with Mangopay brings added rigor to Crowd2Fund compliance procedures.
Moving forward, it is important that the FCA continue to require a diligent but achievable compliance procedure in order to continue allow the crowdfunding industry to grow, but to not be tarnished by short term platforms seeking a light touch approach.
From a global perspective, the FCA should be praised for leading regulation practices. Whilst other countries in Europe are starting to generate crowdfunding activity, there is not yet a single European regulatory framework for crowdfunding. This could be achieved by introducing a coordinated framework, which would result in a pan European capital market. We believe that policy makers looking for a universal regulatory standard should seek guidance by engaging with the best practices established by the FCA.
References:
http://eurocrowd.org/2014/12/12/ecn-review-crowdfunding-regulation-2014/
http://businessadvice.co.uk/finance/debt/p2p-lenders-struggling-to-cope-with-fcas-tougher-regulatory-requirements/
http://ec.europa.eu/finance/bank/index_en.htm
http://www.fca.org.uk/consumers/financial-services-products/investments/types-of-investment/crowdfunding
