The U.K. Financial Conduct Authority adopted regulations to facilitate crowdfunding, which the FCA describes as a way businesses can raise money through online portals to finance their activities. The new regulations provide protections such as minimum capital standards and the requirement for firms to have arrangements in place to continue to administer loans in the event that the crowdfunding platform fails. The crowdfunding regulations take effect on April 14, 2014.
To some extent, crowdfunding already falls within the scope of regulation by the FCA if it involves a person carrying on a regulated activity in the U.K., such as arranging deals in investments, or the communication of a financial promotion in relation to securities. If a crowdfunding platform enables a business to raise money by arranging the sale of equity or debt securities, or units in an unregulated collective investment scheme, then this is investment-based crowdfunding. As such, it is regulated by the FCA and the firm operating the crowdfunding platform needs to be authorized, unless an exemption is available. The new regulations will apply FCA Principles and core FCA provisions to firms running loan-based crowdfunding platforms.
In order to create a proportionate framework that balances regulatory costs against benefits, the FCA does not prescribe how firms should address or disclose the relevant risks. Nor is the agency proposing to set requirements for minimum standards of due diligence at this stage. At present, it is for firms to determine the risks present in their business models and to develop appropriate processes to deal with them. The FCA believes that this approach provides adequate investor protection and sufficient flexibility for firms to operate and arrange finance for small and medium-sized enterprises.
However, greater prescription is an option that the FCA may consider in the future, depending on how the market evolves. The FCA vowed to review the market and its regulatory approach to crowdfunding in the coming years.
The FCA firmly believes that the high-level rules it is adopting are proportionate for this market at this time. The FCA does not consider it appropriate to mandate specific disclosures or the form and content of those disclosures since business models vary across the market. Instead, the rules require firms to consider the nature and risks of the investment, and the information needs of their customers, and then to disclose relevant, accurate information to them. The high-level approach puts the onus on firms to provide appropriate, useful information, and not to over-burden consumers with too much detail.
Although the FCA does not require specific types of information or ban specific terms or disclosure practices, the Authority cautioned firms that they may only use terms such as protected or secure, or make comparisons of returns to savings accounts, when that is fair, clear and not misleading. Regarding taxation, the FCA expects firms to provide sufficient explanation of the position so that customers can understand their tax obligations. The explanations should enable investors to perform their own calculations and compare net returns with those of other investments.