In the UK, market practice currently leads to lower risks for investors on most peer-to-peer lending platforms than on securities-based crowdfunding platforms, so we have drawn a distinction, adopting a disclosure-based approach for peer-to-peer lending, with fewer controls than for securities-based crowdfunding.
Leaving aside the further confusion about regulation in France and the US, it is worth setting out what our rules are on securities-based crowdfunding.
There is a growing consensus that regulation can help boost consumer confidence in crowdfunding, with a vocal minority insisting that we’re taking the “crowd out of crowdfunding”; that we are preventing people from buying unlisted shares in startup companies through crowdfunding platforms.
That’s plain wrong. No one will be prevented from investing.
But we are putting sensible safeguards in place. If you have not had experience of investing in risky, unlisted shares before and wish to invest without advice, you are initially limited to investing no more that 10 per cent of your assets, excluding your home and pension. This restriction applies for the first couple of times an investor tries out this type of investment. After that, so long as you have demonstrated experience and acknowledge the risk, how much you invest is up to you.
It is surely sensible that new investors don’t put all their eggs in a single basket.
Many of the unlisted shares on crowdfunding websites are in startup and growing businesses. That makes them attractive to those looking to give a venture a leg up or get in early on the next big thing. But for every next big thing, there are many more firms that fail.
Over half of these companies fail within their first few years. That means any investor is more likely to lose all of their capital than to get it back, let alone see a return. Since these shares are not listed or otherwise traded on an exchange, you can’t readily sell them, so your money is locked up.
Over the last few years, we have all seen examples in too many sectors where consumers with little information, and without experience, have been bamboozled into buying financial products they don’t want, or making investments that are riskier than they thought.
At the FCA our job is to prevent that.
Businesses and individuals will continue to have access to this innovative form of funding but consumers will be better aware of the risks.
In the past, regulators would come late to the party; desperately playing catch up on a new way of investing, with rules that were designed for preventing problems that had already arisen. I’ll make no apology for the fact that we have moved quickly to put in place rules early on with the support of most of the industry. These allow the industry to continue to grow, and will enable everyone, from those with relatively modest amounts to invest or lend to serious players, to understand what risks they are taking and therefore what they want to put their money into.
Christopher Woolard is director of policy, risk and research at the FCA.