Capital Markets Insights

FCA Balancing Act in the UK Crowdfunding Industry

The UK crowdfunding rules are governed by the FCA (Financial Conduct Authority). However the UK Crowdfunding Association (UKCFA) has come up with a code of practice that is worth noting.

All 15 principles are aimed to both promote and protect the crowdfunding industry in the UK. Some of the principles are covered by the FCA while others are more best practices strategies.

The FCA published a review of crowdfunding regulations in February 2015 and stated that there was no need for change. A good overview of the FCA rules can be found here. The FCA has taken a 'light touch approach' in crowdfunding balancing the need to protect investors against the ability of the industry to evolve without the heavy hand of regulation. Christopher Woolard, director of policy, risk and research at the FCA, said: “We want to ensure that consumers are appropriately protected – but not prevented from investing.”

There are of course those who think the new rules are onerous and will have a negative impact on the industry. Especially the new rule that a UK investor can only invest up to 10% of investable assets.

Edward Griffith, a partner in a law firm DLA Piper, had this to say about the new rules. “Taking into consideration that one of the overall aims of crowdfunding is to allow the average person to invest in companies they would otherwise not have access to, the proposals could be seen as being in direct conflict with the democratic nature of crowdfunding. By espousing restrictions on the type of investor that can participate to those investors who are ‘sophisticated’ and of high net worth, the FCA, although minded to protect the public, might have thrown the baby out with the bathwater.”

While others in the industry felt the FCA was on the right track. Christine Farnish, chair of the Peer-to-Peer Finance Association, is quoted as saying, “We are pleased that the FCA is taking a proportionate approach to the regulation of peer-to-peer lending, in line with its competition and consumer protection objectives. Its statement strikes the right balance between promoting innovation whilst not exposing consumers to significant risk. Peer-to-peer lending is a good news story for UK consumers and its growth should be encouraged. It is however important that all players in this new market operate responsibly. Formal regulation of the sector by the FCA should help ensure that this happens.”

Regulating an industry that is disrupting the financial industry is a challenge not just for the FCA but regulators worldwide as they try to keep up with technological innovations that are changing not only who can invest but how they invest.