The FCA (Financial Conduct Authority) has released new regulations for crowdfunding in a bid to protect consumers from lending to businesses without knowing the risks involved.
Outlined in the policy statement, the UK regulator wants these new alternative lenders to operate in a transparent and fair way by providing clear details of the risks to those looking to invest.
Peer-to-peer lending (a form of crowdfunding whereby investors lend directly to the individual or business) will be regulated from April 2014.
The FCA suggests many individuals are unaware of the risks involved when investing in new businesses and projects, and are proposing new or inexperienced investors to confirm they will not be investing more than 10% of their money on ‘unlisted businesses’.
In the FCA’s statement, the new rules include:
- “Require firms running the loan-based platforms to have plans in place so that loan repayments continue to be collected even if the online platform gets into difficulties.
- New prudential regulations will be introduced over time so that these firms have capital to help withstand financial shocks. This is important as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme”.
The UK regulator also states there will be the same level of protection for consumers, regardless of how they contact crowdfunders, whether it be online or by phone.
Crowdfunding platforms are fast becoming an alternative to banks for many small businesses and start-ups. They have been a huge success in America and now more and more UK platforms are being set up every month to help those in need of funding.
This is an exciting time for new and alternative lenders coming onto the market. The number of crowdfunders and peer-to-peer lenders will no doubt increase as the year goes on. Already in the first two months of 2014, crowdfunding platforms have raised £5.7 million for businesses.
Should banks be worried?