Consumers who want to invest in small or start-up businesses via crowdfunding platforms will receive clearer information about the business in which they are investing, under proposed new rules published by the Financial Conduct Authority (FCA). The changes relate to peer-to-peer lending and equity investment based crowdfunding, the two types of crowdfunding that need regulatory oversight.
Christopher Woolard, the FCA’s Director of Policy, Risk and Research, says consumers need to be clear on what they’re getting into and what the risks of crowdfunding are: “Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding.”
Crowdfunding is a way businesses, organisations and individuals can raise money. Generally, it involves a number of people pooling money through a website, often called a platform.
Consumers willing to lend money to companies through peer-to-peer crowdfunding websites will receive explanations of the key features of the loans as standard. They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites, or platforms, will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses. A 14-day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. New prudential requirements will also be phased in.
The FCA has also proposed new rules for investment-based crowdfunding, which is already regulated. The paper makes clear the FCA’s belief that these investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses.
The proposals will make the crowdfunding market more accessible, will help foster competition and facilitate access to alternative finance options while also providing additional consumer protection.