The Current and Expected Crowdfunding Regulation in the UK.

In all its forms, crowdfunding continues to grow across the UK.  The presence of equity-based crowdfunding sites like CrowdCube, loan-based crowdfunding platforms like RateSetter, donation-based crowdfunding sites like Buzzbnk, and reward-based crowdfunding sites like Kickstarter indicates that the UK embraces all the primary models of crowdfunding. As the awareness of crowdfunding continues to grow, the UK government through some crowdfunding regulation policies, guides the industry to promote transparency and effective competition.

Currently, the UK does not regulate donation-based crowdfunding and rewards-based crowdfunding. However, loan-based crowdfunding and equity-based crowdfunding are under the scope of the UK law. Financial Conduct Authority (FCA), the regulatory body introduced a set of regulations for the peer-to-peer sector in 2014. At the same time, it also introduced some additional requirements for equity crowdfunding sites. Before this, the P2P sector did not fall under any regulatory regime. Now, the regulations require loan-based crowdfunding platforms to obtain a license and conform to standards set out by the FCA.

Equity-based crowdfunding platforms are required to obtain a license or to have regulated activities managed by authorized parties. They are also required to have a screening process in order to sort sophisticated and non-sophisticated investors.  A “non-sophisticated” investor should not be allowed to invest more than 10 percent of their net investable asset through crowdfunding platforms.

Other important regulations in crowdfunding concern the communication of the offers, the language, fairness and clarity of description used to describe the offers and the risk awareness associated with them. These rules aim to establish platforms where people are not only treated fairly but allowed to make well-informed decisions.

Following a consultation launched last year, the FCA recently gave an update on the post-implementation review of investment-based and loan-based crowdfunding market. The FCA’s report lists a number of risk factors related to today’s P2P platforms and confirms the intention of the regulator to consult on future regulation changes.

The FCA is expected to introduce changes to the rules around the transparency and disclosure of information by companies raising money via crowdfunding. The FCA has raised concerns over transparency and the investors’ ability to compare product offerings. Although the new rules will apply to all types of crowdfunding, the focus will largely be on peer-to-peer lending, which in some cases provides products or services similar to more regulated products or services offered by banks. The regulatory body is keen to ensure that the crowd is adequately protected while encouraging effective competition.

Subject to more consultation,  the FCA intend to strengthening rules on wind-down plans,  introduce restrictions on cross-investment,  and extend mortgage-lending standards to loan-based platforms. According to Andrew Bailey, Chief Executive of the FCA, the regulatory body is consulting on these issues because it wants to protect investors and ensure effective communication in the crowdfunding sector.

FCA’s ongoing research and investigatory work are expected to be completed early this year. After that, the regulatory body will complete the post-implementation review and decide whether further consultation on rule changes is required for crowdfunding regulation in the uk.

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