On 3 February 2015, the Financial Conduct Authority published “A review of the regulatory regime for crowd funding and the promotion of non-readily realisable securities by other media“.
The review is brief, but the FCA’s house-style means it’s not as brief as it could be. It makes an interesting read – but it’s difficult to find on the FCA’s website. So, here are the headlines:
- Loan-based crowdfunding in the UK was almost 3 times bigger in 2014, than it was in 2013;
- In 2014, business borrowing was higher than consumer borrowing for the first time;
- More than half of those raising personal loans had been offered funding elsewhere, the average borrower rejection rate was 90%, and the average borrower-default rate was less than 1%;
- 44% of business borrowers thought it was likely, or very likely, that they’d be able to get funding from other sources. The average borrower-default rate for business loans was also close to 1% (at least on some platforms);
- Equity based crowdfunding grew by more than 200% in 2014. 38% of investors were professional or high net worth individuals, but 62% described themselves as retail customers with no previous experience of early stage or venture capital investment. Few investors came to the model to invest in local businesses, or to help friends and family;
- Debt security crowdfunding grew by 63% in 2014;
- By the end of 2014, there were 56 firms operating in (or seeking to enter) the loan based crowdfunding sector; and 35 firms operating in (or seeking to enter) the investment-based crowdfunding sector.
The FCA has been engaging with firms’ senior management, monitoring their websites and reviewing their monthly MI. It’s also carried out supervisory visits in the loan-based crowdfunding sector to asses governance, management and internal controls. There have been a number of interventions in the investment based crowdfunding sector, for example to ensure that only appropriate types of customer were allowed to invest, that financial promotions were clear, fair and not misleading, and that firms had a Part 4A permission that was wide enough for the activities they were carrying on.
Financial promotions issues were identified on most of the investment-based platforms considered by the FCA. Common issues included:
- Benefits were emphasised, without a prominent indication or risks;
- Information was omitted or cherry picked, giving an overly optimistic impression of the investment opportunities available on the site; and
- Risk warnings were diminished by claims that no capital had been lost, or they were less prominent than the performance information that accompanied them.
Similar issues were identified on the loan-based crowdfunding websites. In addition, here:
- Promotions compared crowdfunding investments with savings accounts, giving the impression that the capital invested was secure;
- There was insufficient information about taxation of investments;
- The annual percentage rate (APR) to be paid by the borrower was sometimes omitted or insufficiently prominent; and
- The risks and benefits of borrowing were insufficiently balanced.
Most of these issues have been addressed by the firms concerned, but FCA monitoring will continue in 2015.
Financial promotions for mini-bonds* (both on crowdfunding platforms, and elsewhere), have also generated some concern for the FCA. In particular, it has not always been sufficiently clear that the investor’s capital is at risk, the bonds are illiquid, and FSCS protection is not available.
The review includes a reminder that the financial promotions regime is media neutral; that the FCA has published draft guidance on financial promotions that are communicated via social media; and a promise that the final social media financial promotions guidance will be published before the end of March.
The review seems to at least partially fulfil the expectations generated by UK newspaper reports at the end of January (our earlier blog is here). There is clearly more to come.
* A bond typically issued by a small business, for 3 to 5 years, with a coupon of 6% to 8%