FCA has role to play in supporting crowdfunding, says expert

Financial services and technology law specialist Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said the importance of the FCA's role in supporting alternative investments is highlighted by new figures which show a fall in the volume and value of crowdfunding deals made in the lead up to the UK's EU referendum in June.

During the first six months of 2016 there were 17% fewer crowdfunding investments made than in the last half of 2015, research company Beauhurst has said, according to a Financial Times report. The value of deals fell to £87.4 million in the period from £91.3m, the figure for the latter six months of last year.

Scanlon said: "If these figures are to be taken at face value then what it highlights is that the UK regulators need to continue to address all aspects of regulation relating to crowdfunding platforms in order to ensure that the market remains an attractive one in light of Brexit."

"As we have seen so far through the series of policy decisions the FCA has taken in respect of crowdfunding, there are steps that can be taken which can have the effect of promoting UK crowdfunding platforms as attractive marketplaces for investors. Specifically, the regulator should think closely about how its rules around financial promotions, anti-money laundering due diligence requirements and maximum investable amounts via crowdfunding platforms could be altered to further support the development of the sub-sector," he said.

Last month the FCA opened a call for input on a post-implementation review of crowdfunding rules it introduced in 2014 in which it said it is considering applying new standards of disclosure in the crowdfunding market and placing new regulatory duties on platforms that facilitate peer-to-peer loans or investments.

In relation to investment-based crowdfunding the FCA said it could place platforms subject to new due diligence standards. It said it wants to ensure investors have sufficient protection against the risk of losing their money when businesses seeking funding through platforms fail and that financial crime risks are also being sufficiently mitigated.

The regulator said it could also "consider whether to mandate additional disclosures" from investment-based crowdfunding platforms. These could include requiring the platforms to set out "how many businesses that raised funds have since failed and how many have had successful pay-outs".

"We could also consider requiring firms, when setting out the money raised so far on a pitch, only to include money contributed on the platform from persons unconnected to the business," it said. "If firms quote money raised from other sources, there is a concern that this can lead investors to believe there is more interest in an investment than is the case."

In its paper the FCA said it also has plans to "review disclosure standards" in relation to loan-based crowdfunding after highlighting "potential concerns about how firms are presenting information to investors". It said it could "mandate in detail the disclosures we expect and the time that those disclosures must be provided".