UK FCA releases interim feedback paper

December 13, 2016 • By Emily Mackay

“It is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings."

On 9th December 2016 the UK's Financial Conduct Authority (FCA) published interim feedback on its recent post-implementation review of the 2014 crowdfunding rules.

Regular readers may remember Crowdsurfer submitted a response to the review, which we summarised in our October blog “The UK continues to lead the way” - Crowdsurfer’s responses to the FCA post-implementation review. We see in the FCA's paper, that many of the points we raised around the need for clearer or more industry information were echoed and complemented by other respondents.

The latest FCA publication summarises feedback on the equity crowdfunding (investment-based crowdfunding) and P2P lending (loan-based crowdfunding) to date, and outlines proposals to build on the responses.

It’s important to remember this is only the interim paper, and so we can expect more in the coming months, however the review has already touched on many areas of potential improvement in both forms of crowd finance.

Issues of transparency and access to data pepper the paper, as well as standardisation of information, which in our opinion, is critically important to building and sustaining trust in the industry.

The message that seems to have come from consultation respondents is one of concern about over-regulation, balanced by disquiet about standards. Many of those concerns may be addressed, or at least the risk properly measured, through sharing more (non-personal) information and data.

Overall, the sentiment we see from the FCA is that standards can, and should, be raised. As the European leader in crowd finance, this is good news for the UK; it means there’s room for the UK to get even better, strengthen itself and its position, and grow further.

We certainly want that to happen!

Specifically more disclosure of information could help draw the distinction between investment management and crowd finance. We believe that clear, frequent data is vital to creating trust and understanding of the sector. Disclosure is necessary to building trust and therefore to scaling up, so should be embraced as a tool for improving and growing the market. Many platforms do already embrace this, however, there’s clearly much more progress to be made.

However, the current impact of limited or patchy data disclosure is far-reaching and has the potential to undermine industry growth. At a fundamental level, the FCA states: “It is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings." Our experiences in curating the industry's data definitely echo this - it's very messy and lots of effort is needed to create consistency. Even then there's still too much room for misunderstandings.

The review suggests a range of potential actions, as well as some implicit recommendations for change.

Here's our view of changes relating to information publication that could be required or advisable following the review completion:

Investment-based crowdfunding

  • Offer further details on how businesses perform post raise (Seedrs has already pre-empted this and started reporting)
  • Declare the rationale behind pitch valuations so they can be compared across platforms and indeed within sectors.
  • State openly the type of investor pledged money (connected/unconnected, platform/not-platform, institutional/retail).

Loan-based crowdfunding

  • Clear communication of expected and actual default rates and where other monies (e.g. the platform's own are used to make or buy a loan); “It is difficult for investors to assess the risks and returns of investing on a platform” and “Firms’ desire to maintain confidence in platforms has occasionally led to firms acting in a manner, masking true loan performance and exposing investors to risks. This has included management intervening to influence the performance of loans (e.g. by covering arrears) or otherwise acting to support the platform (e.g. lending to provision funds).”
  • Increased disclosure on where a deal has been originated from or where capital has come from, if a different platform:"Additional requirements or restrictions on cross-platform investment"
  • Showing how long, on average, investors keep their money in loans
  • Clearly marking/declaring which loans are offered to institutions and which to retail investors (including after its been taken), as well as what kind of investor then takes them up.
  • Creating performance benchmarks of funds investing in loans.

The UK has every opportunity to continue leading the way in setting the world's standards for crowd finance. So whilst a regulatory review isn't the most pleasant process, perhaps it's the tough love we need to grow!

Emily Mackay