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Britain Cracks Down on Crowdfunding

Britain Cracks Down on CrowdfundingBritain Cracks Down on Crowdfunding

Crowdfunding platforms that offer home loans should be regulated like mortgage lenders to improve safety and transparency for customers, Britain’s Financial Conduct Authority said.

Crowdfunding or “peer-to-peer” operators collect small sums of money from many people online to lend to companies or individuals, or invest in bonds. The size of the market in Britain stood at £2.7 billion ($3.40 billion) last year, up from £500 million in 2013, Reuters reported.

The watchdog’s recommendation was included in the results of a public consultation into rules it introduced in 2014, which it said needed tightening up because the market was changing rapidly. “We plan to consult on additional rules in a number of areas,” the watchdog said.

“These include more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms.”

Firms like Funding Circle, Zopa and Seedrs cut out banks by bringing together lenders and borrowers, or channeling investment into start-ups.

FCA chief Andrew Bailey said not all platforms were being clear to customers about how they worked, with some “potentially misleading” in the way they presented their investment strategy or the role of reserve funds or provisions for loan defaults. “It would be wrong to give investors the idea they would never lose money as a consequence of having a reserve fund,” said Bailey.

A core aim of new rules would be to have a clearer boundary between crowdfunding and asset management, he said.

 Better Enforcement of Rules

The UK Crowdfunding Association, with many members from the investment side of the sector, said issues raised by the FCA highlighted the need for better enforcement of existing rules rather than new ones.

The watchdog is assessing applications for full authorizations from numerous platforms, a process that has thrown up many of the concerns it has identified.

To date, it has received 377 applications for licenses, with 16 platforms fully authorized, and of the 77 still being assessed, 36 have an interim license. Over 280 applications have been withdrawn.

“They got the wrong idea of what this is all about,” Bailey said.

Some in the sector have criticized the watchdog for being slow in authorizing firms, but Bailey said business models were continually changing, making it more time-consuming for the regulator to vet applications.

Christine Farnish, chair of P2PFA, an industry body, said it was not easy for a regulator to grapple with new market entrants when they are disrupting traditional business models.

“We trust that the critical consumer outcomes test—based on a balanced and evidence-based assessment of benefits and risks—will be applied as the review moves forward,” Farnish said.

The regulator said it would consult next year on additional rules to strengthen “wind-down” plans, additional requirements or restrictions on “cross-platform” investment, and extending mortgage-lending conduct standards to loan-based platforms that offer home loans.

The watchdog’s review found that in both loan and investment crowdfunding it was hard for investors to compare platforms, or compare crowdfunding with other asset classes.

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