Finance

FCA crackdown: UK crowdfunding will get harder, but your money will be safer

By Oliver Smith 9 December 2016
Summary

Crowdfunding is risky, we know that, but just how risky is it?

Is lending money to a small family business via a small platform like Folk2Folk more or less risky than putting your money into a larger platform like Zopa?

How safe is your money if the business or platform goes bankrupt? What about the risk of investing in businesses via SyndicateRoom or Seedrs?

Answering these questions isn’t easy – we found that out when we tried to compare the performance of three biggest crowdfunding platforms – and it’s made even harder as these brands invest in flashy marketing campaigns that highlight the opportunities, rather than the risks.

Last year £3.4bn was invested across crowdfunding platforms, it’s an industry that is essentially replacing traditional banks with a large number of British businesses.

But now the UK’s financial regulator is planning a clampdown, with new rules to help people better assess the risks and returns on their investments.

Crowdfunding clampdown

The Financial Conduct Authority (FCA) today said it found that in crowdfunding it was hard for investors to compare different platforms, different businesses raising money. It’s also difficult to easily compare crowdfunding to other investment opportunities, like buying stocks or shares.

The FCA is now mulling rigorous regulations like “mortgage-lending standards” for lending platforms like Zopa and Funding Circle. This would also include tougher rules around how much information platforms must give to investors and what kinds of marketing or promotions they’re allowed to run.

That’s good new for someone looking to invest or lend money through Crowdcube or Zopa, but probably bad news for businesses and some crowdfunding platforms as they could have more rules and hoops to jump through.

“I’m pretty comfortable with what it means for us,” Gonçalo de Vasconcelos, the CEO of SyndicateRoom, told The Memo. “We welcome the proposals as it’s long been known that not all platforms are born equal. It’s important that investors don’t see all platforms as equal and these changes would ensure that.

Vasconcelos also said he’d like the rules to go further, requiring crowdfunding platforms to disclose the performance of every company they have raised money for.

“Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers,” said FCA chief Andrew Bailey.

“Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas.”

The FCA said it will consult on any new rules in 2017.