In 2014, new rules came into force for crowdfunding platforms operated by regulated financial firms in the UK. Two years on, the Financial Conduct Authority is thinking of changing them.

The process is likely to be a slow one. The FCA has just published a paper full of suggestions, to which it is inviting comments. Investor-protection, i.e. the protection of investors from sharp practice and/or their own gullibility, is the name of the game.

Crowdfunding is a way in which people, organisations and businesses, including business start-ups, can raise money through online portals to finance or re-finance their activities. These portals, which act as brokers between parties looking to invest money and parties who want to raise money, are commonly referred to as crowdfunding platforms. Some crowdfunding activity is unregulated, some is regulated and some is exempt from regulation. The FCA regulates loan-based crowdfunding platforms, on which high-net-worth investors and institutions lend money to people or businesses in the hope of financial returns in the form of interest payments and the repayment of capital over time; and investment-based crowdfunding platforms, on which people invest in unlisted shares or debt securities issued by businesses.

The FCA is worried about regulatory arbitrage between crowdfuding operations and the banks; the development of new loan-based crowdfunding business models; the pooling of investors; people not understanding the risks involved in the ISA (Individual Savings Account) wrapper; and the vagueness of standards that govern disclosures to investors.

John Goodall, the CEO and co-founder of peer-to-peer platform Landbay, told Compliance Matters: “This call for information is a welcome move by the FCA. Crowdfunding is a broad church, with a rapidly growing congregation; but the umbrella term is being used to describe an increasingly wide range of financial products and [certain people might take this opportunity to] mislead investors. A clear example of this would be equity crowdfunding and peer to peer lending, which are entirely different forms of investment with completely different risk profiles.

“For P2P lenders like Landbay, we would encourage clearer definition of the different types of crowdfunding, particularly between the equity and debt varieties. We work with credit-worthy borrowers, and all investments are backed by a double-lock level of protection of secured buy-to-let mortgages and a reserve fund. After two years of lending directly to experienced landlords, we are yet to have a single default or late payment.”