CAN THE UK REGULATORY FRAMEWORK COPE WITH THE EXPLOSIVE GROWTH OF CROWD FINANCE? 

By Emily Mackay, CEO, TAB

Emily Mackay
Emily Mackay

The UK alternative finance market is more buoyant in 2017 than any time previously. More than £8B has been moved over UK crowd platforms to date, and nearly £3B of that in the year to date. According to our data analysis, the average raised, across all attempts that ended within 2016 was £10,858. The same measure for those that ended in 2017 is £20,734. Remarkable growth, particularly amidst so much societal, financial and political uncertainty.

In the UK, the Financial Conduct Authority (FCA) regulates equity and debt based online funding activity. There are currently 230 operating crowdfunding platforms in the UK, of which around 150 fall under the regulatory rules of the FCA. The regulator has been involved since the early days of the industry and more recently has become more cautious and proactive as the industry matures. But does this approach suit the rapidly emerging industry? And what does the future of regulation look like for alternative finance?

Current regulation

In the UK, P2P lenders and equity crowdfunding platforms perform regulated activities. The FCA defined the rules in 2014 but is currently consulting on and reviewing the progress to date. Donation and rewards platforms are not subject to the same regulation, but they are bound by English Common Law.

Crowd finance platforms must obtain FCA authorisation before commencing regulated activity (or operate under relevant interim permissions or umbrella status, also overseen by the FCA). Any communications made to potential investors or lenders by a crowd finance platform to promote an investment or lending opportunity comprise a financial promotion, hence needing regulatory oversight.

The FCA conducted its latest regulatory review in 2016 and is consulting with market participants to understand how it can support the development of UK crowdfunding markets. This is another example of the UK regulator’s sensible and supportive approach.

What’s the future?

P2P lending is undoubtedly headed towards a more detailed regulatory environment as the volumes being transacted move into tens of billions, and institutional involvement continues. In an interim feedback statement issued in December 2016, the FCA questioned whether some P2P platforms were acting more like banks or collective investment schemes and observed that it can be difficult for investors to compare platforms and assess risk.

It also raised questions regarding financial promotions and stating that platform-run provision funds – used by Zopa, RateSetter and others – need to be explained in more detail to investors. The regulator is considering more stringent P2P lending rules to ensure retail investors are informed of the risks. These could include “setting investment limits” and extending “mortgage-lending standards” to P2P platforms.

All in all regulation is growing with the platforms. The question is, does the complexity hamper new entrants, simply re-creating a difficult-to-enter market in a new form, and unwittingly creating anti-competitive advantages for the early entrants?

Next-generation regulation for next-generation finance

The FCA will complete its research in 2017 and any new rules would come into force in 2018. We believe that in the long-term participants in crowd financing should only benefit from next-generation regulation which helps increase credibility and trust amongst investors and fund-raisers.

Regulation tends to follow market shocks and negative headlines, so it’s positive that the UK regulator has reacted before any substantial negative industry have occurred. I’d like to believe this has prevented or at least lessened potentially damaging industry events. However, with any down cycle I would expect further scrutiny, driven by data analysis or actual risk rather than media headlines and hype.

As alternative finance activity is mostly conducted online, this increases visibility, while the fragmentation of deals and decisions to participate, draw on many more brains and spread the exposure. So it’s cleverer in risk distribution than traditional finance. Furthermore, alternative finance is in reality no less stable than other forms of finance – it is just a different and fairer approach.

Although they have matured quickly, P2P lending and equity crowdfunding are no longer new kids on the block. They are maturing into mainstream asset classes, so it’s only right the FCA should review its regulatory approach to alternative finance, ensuring that it will be able to cope with the explosive growth the industry has seen, and also providing significant benefit in supporting that growing maturity.

Emily Mackay is CEO of TAB, data intelligence provider for the global alternative finance market

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