The FCA’s proposed changes to rules for crowdfunding platforms has generated concerns among this fast-growing industry.
In its Consultation Paper, the FCA considered loan-based “peer-to-peer” and investment-based crowdfunding as a high risk investment and proposed to block many retail investors’ access to these platforms. The FCA justified this stance by noting that it had observed “some poor business practices” in parts of the sector and that while so far, losses and defaults across the “peer-to-peer” sector have been low, the sector had still not gone through a full economic cycle, “when economic conditions tighten, losses on loans and investments may increase”.
The FCA’s strategic objective is to ensure that the relevant markets work well. To advance its strategic objective, the FCA has three operational objectives. These are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system, and to promote effective competition in the interests of consumers.
It could be argued that the FCA’s proposed changes to crowdfunding platform rules highlight the natural tensions all regulators face when balancing their objectives, in this case, the FCA has to carefully balance its competition and consumer protection objectives. This balance can be particularly delicate in the area of technological innovation because of the difference of pace at which regulation and technology evolve.
Technological innovation is rapid, and certain technologies that seemed disruptive only a few years ago are now well-established. Regulators, however, usually have to play catch-up with technological developments and assess how the market is developing. They need to assess the risks, then decide when, if ever, it is most effective to intervene. This is a lengthy process. Crowdfunding is now relatively well-established, and yet, regulatory restrictions happen now, potentially modifying the future development of the sector.
It will be interesting to read the feedback that the FCA receives for this Consultation, both from industry participants and consumer associations, and how the FCA will balance the industry’s concerns about competition risks if it decides to go ahead with its proposed changes to the rules.
Umair Choudhry and Morgane Fouche
“On the one hand they are talking about the promotion of competition — the UK likes to be ahead on fintech — and on the other hand they have come to a fork in the road and they have chosen to be risk-averse,” said Mr Lewis.