The UK financial watchdog, the Financial Conduct Authority (FCA), is cracking down on equity crowdfunding after finding that most companies in the fast-growing industry were misleading investors about the risks.
The FCA said that it’s considering new rules since retail customers with little experience of investing may not be able to assess the risks and returns of investing on crowdfunding platforms that arrange loans or equity investments.
Following a five-month review of the industry, FCA said that some P2P firms were giving unrealistic impressions of the investment and do not comply with its requirements in their promotions.
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Some companies were not sufficiently managing the risks or conflicts of interest in their operating models, while others had inadequate plans for winding down their operations in the event they fail due to defaults, the FCA said.
Investors may lose everything they put in
The FCA is also concerned that there are some peer-to-peer lending platforms that mis-sell their products by using rainy day funds to offset losses. The regulator has previously warned investors they may lose all their money with so-called equity crowdfunding which involves taking stakes in unlisted start-ups, or make loans to them, similar to the way venture capitalists do.
Crowdfunding is growing rapidly in the UK with an estimated £2.7 billion invested on regulated platforms last year, up from £500 million in 2013. The FCA took over regulation of peer-to-peer and crowdfunding in 2014 and committed at the time to a full review of their impact.
With many smaller start-up platforms joining the fray, equity crowdfunding platforms in the UK are expected to process £120 million of equity investment in 2016, a five-fold jump from only £25 million reported three years ago, according to statistics from the industry data provider AltFi.
FCA chief executive Andrew Bailey said: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interest of consumers. We plan to consult next year on new rules to address the issues we have identified.”