The UK Financial Conduct Authority (FCA) has today published its interim Feedback Statement (FS16/13) on its call for input to the post implementation review of its crowdfunding rules.
This is a long-winded way of saying that the FCA is part way through its consultation on changing the rules on UK crowdfunding and that we are now closer to seeing what the new rules might look like. The proposed new rules will be circulated by the FCA early in 2017 (in another consultation paper) and there will be further opportunity for firms to provide feedback at this point. Firms impacted by these possible changes should be thinking about what they might mean for their businesses, as well as considering preparing feedback in time for the next consultation paper, which will contain the new draft rules.
We published a briefing on the FCA's call for input in July 2016 and many of the points of concern remain the same in today's Feedback Statement.
We summarise 10 key new points in today's Feedback Statement below:
- The consultation process will continue with further consultation in early 2017, final conclusions published mid-2017 and then with the final rules expected to be implemented during 2018.
- The FCA has said it is still worried about 'regulatory arbitrage', whereby firms are using crowdfunding to provide services similar or identical to investment management or banking, or operating unregulated collective investment schemes, without obtaining the appropriate authorisation or offering the necessary consumer protection for those activities.
- Disclosure and customer communication are still very much on the radar. For loan-based crowdfunding the FCA has said it will consult on additional rules requiring a 'consistent minimum basis for investor disclosures'. With investment-based crowdfunding the FCA has said it will consult on new rules on disclosures and in particular the rules will be intended to place requirements on the content and timing of disclosures. In general the FCA has said it has concerns about the quality of communications between firms and potential investors.
- The FCA has explicitly said that it does not believe that loan-based crowdfunding can be described accurately as a 'savings' product. This supports previous comments by the FCA on this point.
- The FCA has stated its concern about conflicts of interest, in particular arising due to preferential treatment of institutional investors. Any preferential treatment of institutional investors, even if fairly disclosed, conflicts with the requirement to treat customers fairly.
- There has not yet been a decision by the FCA on whether loan-based crowdfunding should be subject to the same knowledge and experience rules as investment-based crowdfunding. The FCA has stated that any new rules will be based on its research. This is a key potential area of change and firms in the loan-based crowdfunding sector should keep up to date with any changes in the FCA's stance.
- The FCA reminds us that the client assessment rules for financial promotions about investment-based crowdfunding are rooted in legislation and that it is down to firms who make financial promotions to 'believe, on reasonable grounds' that a client is either high net worth or sophisticated. There are fears that firms are not actually undertaking proper assessments and the FCA will consider whether additional supervision of this process is required.
- Loan-based crowdfunding 'wind down' plans are also under scrutiny, with the FCA stating its concern that the winding up of platforms may not take place as expected or may be inadequate to protect the interests of investors. There will be consultation on rule changes in this area, although no specifics are given at this time.
- We see that the FCA is focusing on 'cross-investment' in loan-based crowdfunding. There is not much detail given, but we understand that the FCA is concerned about the knock-on impact the failure of one platform may have on others, where that platform’s products have been repackaged or bundled into products and are offered to investors by another platform. There may be a risk of contamination between platforms where this happens. The FCA will consult on additional requirements on 'cross-investment'.
- It is encouraging that the FCA has stated it is carrying out research in the crowdfunding industry to collect data about its various areas of concern. The industry will be hopeful that this research leads to any new rules being an accurate reflection of the real risks to the public, rather than being a result of theoretical harm perceived by the regulator.
Further clarification on all these points is expected but the Feedback Statement provides an indication of where the FCA will be focusing its attention in the coming months.
We will publish a full briefing on today's FCA interim Feedback Statement in due course, which will provide further details on what the new rules are likely to look like and what to expect in the next consultation paper, due in early 2017.