HM Insights

What will the FCA's crackdown on crowdfunding and peer-to-peer lending mean?

Earlier today, the FCA made a formal announcement of its plans to further regulate crowdfunding and peer-to peer-lending in the UK in 2017. The last time we saw formal regulation from the FCA in relation to these two sectors was in April 2014, and since then we have continued to see growth in the numbers of businesses using these alternative methods of raising finance. In fact, in 2015 the amount raised through peer-to-peer lending in the UK totalled £881 million. An increase of regulation in this sector has therefore been expected for some time.

Peer To Peer Lending Crowdfunding Regulation Law Scotland Harper Macleod

What is being looked at?

Peer-to-peer lending seems to be bearing the brunt of the proposed regulation with the FCA identifying that more is required in order to educate the investors as to exactly what they are investing in and exactly what the risks are for this type of investment.

There is talk of a move towards regulation more in line with that associated with mortgage providers, although the FCA does recognise that whatever the regulation, it needs to be appropriate for the risk associated with this type of investment.

Some of the main concerns which have been raised through the FCA consultation period on this matter thus far have included:

  • Failure of some platforms to meet the 'clear, fair and not misleading' test in relation to financial promotions;
  • Inadequate disclosure of risks by the platforms to the investors;
  • Level of disclosure requirements and the timing associated with these disclosures being made;
  • Handling of client funds; and
  • Lack of clarity for investors as to provision funds (funds which lending platforms ring fence funds to repay investors in the event that the company defaults in repayment).

What happens next?

The FCA is therefore looking to address these issues with regulation next year. It remains to be seen as to when this regulation will be introduced and exactly how far this will go, but it is anticipated that a formal consultation on the regulatory proposals will take place in the first quarter of 2017.

Peer-to-peer lending has seen unprecedented growth in the last year in the UK, with over £20 million being raised by Scottish businesses in the last three years through peer-to-peer lending platforms. The law of averages dictates that there will be some investors who lose out when there is the inevitable failure of some of the businesses which have received lending.

This is the fear of the FCA and given its role to protect consumer interests, it will now need to consider exactly how the balance is struck between protecting those consumer interests without causing the market to stagnate.

As professional advisers with a keen interest in the sector, we'll participate, and watch with interest, as the consultation and inevitable review progresses and keep you up to date.

Get in touch

To find out more about how we can assist you in relation to equity crowdfunding or crowdlending, please get in touch with a member of our team.