The patient capital review consultation may have closed in September, but debate around it has not.
As November’s Budget fast approaches and Brexit uncertainty worries business, the political emphasis for encouraging Britain’s budding entrepreneurs and high-growth firms becomes more astute.
To date, a good deal of the debate has focused on tax. The investment sector believes that the favourable tax treatment of vehicles like enterprise investment schemes, seed enterprise investment schemes and venture capital trusts (VCTs) is under threat from the Treasury.
But if it ain’t broke, why fix it?
Of course the Treasury’s perspective is rather more focused on money that has escaped its coffers – £570m for VCTs alone in 2016-17.
That this bumper inflow came as a surprise to the investment sector (just 38 VCTs were available for investment in that period, compared to 45 the previous year) should be a factor considered by a government that stated in its manifesto that: “we will help innovators and startups, by encouraging early-stage investment and considering further incentives under our world-leading enterprise investment scheme and seed enterprise investment scheme”.
Yet while there has been a great deal of conversation about tax, little has been said about the UK equity and debt crowdfunding sector. Peer-to-peer platforms are a new, growing, and useful addition to the existing framework of venture capitalists, angel investors, private equity, the AIM market, government grants, tax incentives, and the banks – and they deserve their place at the table.
But this place is far from assured, and the platforms themselves need to work harder to prove that they deserve it.
Since June, the sector has been waiting for the Financial Conduct Authority’s (FCA) report on crowdfunding platforms, and it is now expected to land in this month.
Their interim report published at the end of 2016 said that “tougher rules are required to protect investors in crowdfunding platforms”, and noted that it is difficult for investors to compare crowdfunding sites with each other – or with other asset classes – due to “complex and often unclear product offerings”.
It is not unreasonable from this to expect that the FCA will demand that the platforms consider the best interests of their users by making relevant data more transparent, more consistent, and therefore more comparable.
Sadly, little has changed since the publication of the interim report.
Most of the platforms are seemingly deaf both to the FCA and their critics, who remain concerned that people could be misled about the risks inherent in this type of investing. In so doing, they risk jeopardising their place in the funding framework that the patient capital review will hopefully cement.
Yet it need not be so.
A coalition of the willing could work with existing aggregators to make key investor information public next week, if it wished.
By being more open about how money is invested, about declaring special interest and institutional investments, about checking the validity of the companies looking to raise capital, and by working with and encouraging analysts willing to research these companies, they could go a long way to proving to the regulators and to their critics that the sector is serious about the best interests of its users.
If crowdfunding platforms don’t follow the spirit of what the regulators are asking of them, they risk more stringent regulation that could strangle their growth potential, large fines, and reputational damage that could prove lasting – if not terminal. This would suppress an important component of the funding framework that Britain’s fast-growing young companies sorely need to survive.