UK FCA Says It Needs To Revisit Crowdfunding Rules

After seeking comment regarding crowdfunding regulations in July 2016, the U.K.’s Financial Conduct Authority revealed its findings late last week.

According to a report covering the findings, the FCA concluded that, given problems it has pinpointed in the crowdfunding industry, it has to revisit rules, and some of them have to be made stricter in order to protect borrowers and investors.

The review encompassed both investment and loan crowdfunding platforms and found, among other things, there was poor customer communication and disclosure. The FCA found that both investing and loan crowdfunding companies don’t explain the inner workings of their products in an effective manner, which makes it hard for investors to assess how risky investing may be. The authority also found some crowdfunding companies hide the fact that they are underperforming.

The FCA also found there are conflicts of interest because of slack internal communications. The FCA said, for example, several crowdfunding platforms give preferential treatment to institutional investors over others. Additional findings include that platforms engage in risk taking by expanding into investment management and banking as a way to stay profitable. They do it without the expertise or authority to do that. What’s more, the FCA said a number of platforms enable cross-investment, which exposes the platform to the failures of third parties. Finally, the FCA said a lot of the crowdfunding platforms don’t have strong wind-down plans in place to continue servicing existing loans in the event they go under.

Some of the remedies the FCA is considering include having better wind-down plans, incorporating “more prescriptive” rules in terms of the content and frequency of company reports so investors know more about the platform and placing more limits on cross-investments.