In the UK, you cannot start a P2P lending platform without authorisation from the Financial Conduct Authority (FCA) — a body that regulates financial activities.
While some types of crowdfunding are spared from the regulation, other types are going to face stricter laws. In this article, we will tell you about the FCA crowdfunding rules in 2018 and where they apply.
How Is Crowdfunding Regulated in the UK?
There are not so many countries in the world that regulate alternative ways of funding yet. Very few European states do that, and the UK was one of the pioneers.
Equity crowdfunding, however, has been regulated in the UK by Financial Services and Markets Act 2000 even before the “crowdfunding term was coined.
All transactions related to investments have to be authorised by the regulator (Financial Services Authority at that time), should they be arranged online or offline.
In March 2014, the FCA (formerly FSA) introduced the new rules to regulate crowdfunding.
They aim to facilitate the development of the industry in order to:
- attract both investors and lenders;
- protect consumers by ensuring transparency and availability of information;
- improve the state of the UK financial system;
- encourage positive competition in the sector.
What Types of Crowdfunding Are Regulated in the UK?
Today, the FCA regulates equity and loan-based crowdfunding (peer-to-peer lending). Donation and reward-based crowdfunding platforms are spared from the regulation as they don’t offer equity stakes or return.
In February 2015, the FCA published a detailed review of the regulatory regime of crowdfunding where they examined the implementation of the new rules, the effectiveness of the new regime, and the key concerns.
Later in December 2016, the authority published an Interim feedback to the call for input to the post-implementation review of the FCA’s crowdfunding rules.
The rules focus on providing the consumers who wish to lend their money with clear information in order to assess the risk and realise who they ultimately lend to.
As the owner of the platform, you must protect client money and have a resolution plan in case things go off the rail.
The FCA Regulations for Peer-to-Peer Lending
Previously, peer-to-peer lending platforms were regulated by the Office of Fair Trade (OFT).
Once the FCA took over, they granted all the firms holding OFT licenses before April 1st, 2014 an interim permission to continue operations while preparing for the FCA authorisation. The companies that registered after April 1st, 2014 have to go through a full authorisation cycle.
The main concern of the Financial Conduct Authority is that loan-based crowdfunding platforms position their services as equivalent to holding money on deposit, thus misleading the investors about a great risk of losing some or all of their money.
According to the FCA, loan-based crowdfunding firms should make the necessary changes to their websites so that they are fair, clear, and comply with the regulator’s rules.
P2P lending rules include the following:
- A minimum capital to operate a P2P lending platform — £50,000.
- Expose transparent information about the platform to allow customers to understand who they are dealing with.
- If the platform compares its interest rates with interest from a regular savings account, it must be clear and not misleading.
- Any marketing materials (brochures, online ads, or broadcast) must be fair, otherwise, the FCA can ban them.
- All risk warnings should be prominently indicated.
- No cherry-picking or deliberately omitting the information that can create an unrealistically optimistic impression of the investment.
- Investors can get in touch with the financial ombudsman service to handle complaints.
- The borrowers have a cooling off period of 14 days during which they can withdraw from the deal.
The FCA Regulations for Investment-based Crowdfunding
The FCA defines investment-based crowdfunding as a platform where “consumers may invest directly or indirectly in new or established business by buying investments such as shares or debt securities.
The rules include the following:
- Platforms may work only with clients who meet certain criteria:
- High net worth or sophisticated investors such as VCs and high-net-worth individuals.
- Clients who take regulated advice.
- Clients who can confirm that they will invest less than 10% of their net assets in a certain security.
- Firms should verify that customers realise the risks if they do not take regulated advice.
The FCA Crowdfunding Review 2018
The regulator is yet to publish their post-implementation review of the P2P lending industry which was due in 2017.
A few industry sources mention that the review is pushed back as the FCA has other important Brexit related regulations on their plate. Other sources report that the review may not see the light until the second quarter of 2018.
With that said, a report compiled by the Cambridge Judge Business School’s Centre for Alternative Finance (CCAF) which will be included in the FCA report already provides some interesting findings:
There is more pressure on crowdfunding platforms in terms of distinguishing themselves by providing innovative products and better service.
- 88% of surveyed UK based peer-to-peer lending platforms see the existing regulations as appropriate.
- 7% of surveyed alternative finance platforms deem the existing regulations to be too relaxed.
- Only 5% considered the existing P2P-lending rules too strict.
- 93% of investment-based crowdfunding platforms think the existing regulating measures are adequate with only 7% who consider them too relaxed.
The FCA Regulations in 2018
While the FCA report is still pending, it’s quite clear they will continue to introduce more rules to abide by as investors still do not completely understand the level of risk they are facing.
A recent warning from the FCA regarding online investment scams shows that the consumers in this industry are still vulnerable.
P2P lending platforms should monitor the regulator’s announcements as the regulations are expected to be very customer-focused and aim to change the way consumers perceive FinTech startups, thus giving the firms competitive advantages.
Recent changes in crowdfunding rules UK
In July 2018, the FCA opened a consultation on changes it proposed to the crowdfunding regulations framework.
The proposals can be divided into several areas they relate to:
- marketing of loan instruments;
- independent control functions (compliance, risk, audit)
- risk management framework;
- public disclosure of loan risk/duration, rates of return, etc.
New rules were projected to eliminate the investor risk by reducing the number of backers placing an unsuitably high concentration of their wealth in P2P loan instruments and those angels investing in unsuitable instruments.
A year later, the discussion was finished and summarizing the feedback collected, the FCA introduced the final rules and guidance.
Changes apply to:
- P2P service providers;
- investment-based platforms;
- trade bodies functioning in the crowdfunding sector;
- individuals and businesses, potential and existing borrowers;
- consumer organizations.
As a result of new rules and laws, platforms have become well-governed and compete effectively for business; investors – have got clear and accurate information about the investment risk and are appropriately rewarded for it.
FCA crowdfunding 2020: the future steps
- elaborating requirements for holding additional capital aimed at protecting investors in the event of platform failure;
- consolidating rules and instructions for platforms on the basis that the variety of business models is increasing;
- continue to provide companies with a choice of implementation options depending on the services they offer and the size of their business;
- finding ways to reduce both the probability and impact of a failure of P2P platforms;
- keeping crowdfunding regulation UK proposals under review to adjust them to changes in the UK regulatory framework in the future.
Our clients: companies under UK crowdfunding regulation
Shojin Property Partners is a real estate crowdfunding company providing access to institutional-grade investment opportunities for UK-based and international angels and following FCA rules and regulations.
A unique feature of Shojin is that it participates in each and every project on a co-investing base and shares the risks and benefits with other angels.
Shojin has its own due diligence procedures helping the company vet both investors and borrowers before they got access to the crowdfunding market.
Shojin follows the FCA recommendations and assesses whether its clients have the necessary knowledge and experience to understand the risks in the investment products they offer.
Shojin supports ISA and IFISA investments enabling investors to receive any returns they make on eligible crowdfunded investments without the tax burden.
Homegrown is a standalone crowdfunding company aiming to address a fundamental imbalance in the residential development market. It helps property developers to implement more projects, which leads to more homes in the UK. On the other side, new opportunities will pitch the attention of potential backers wanting to gain better returns.
Homegrown promises up to 13.4% returns on investments.
Homegrown partners with Global Custodial Services Limited who are authorised and regulated by the FCA.
The platform took into account new FCA rules and regulations when creating a system for eliminating risks associated with investing in property.
All members should read their full risk warning before making an investment through Homegrown.
CapitalRise is a group of professionals in property investments, technology, law and finance putting their own money into projects fundraised via the platform.
What sets CapitalRise apart from the crowd is vast experience in real estate crowdfunding, co-investing and zero administration fees.
CapitalRise Ltd is an Introducer Appointed Representative of Prosper Capital LLP which undergoes the FCA’s regulation of crowdfunding.
Despite offering ISA and IFISA investments, CapitalRise warns backers that all the deals are much riskier than savings accounts and include extra risks such as political, geographical, illiquidity, and environmental factors.
When you start your investment or loan-based crowdfunding business it’s your responsibility to ensure that everything you do stays in the legal framework.
JustCoded as a web-development company will be glad to help you implement all the necessary features required for FCA authorisation.
All of our key clients who run their online investment business in the UK — Shojin and HomeGrown — have successfully passed the authorisation, so it’s not an impossible thing to do.
Should you have any questions about the regulation of peer-to-peer lending in the UK — do not hesitate to contact us. We will definitely be able to hook you up with the right person to provide proper advice.