The FCA has published the long awaited rules relating to crowdfunding platforms. These are interesting from a regulatory perspective, as crowdfunding is a new and vibrant industry which isn’t often experienced in the regulatory field. Futhermore, because of its wholly internet accessed client base, the generally start up nature of the investee companies and borrower profile, a unique focus of risk is presented to investors and lenders.
The regime covers peer to peer lenders, where individuals lend money via an online portal to borrowers, and securities based internet investments, where investee companies issue shares or loan notes in response to online applications from investors.
The FCA's approach
The FCA approaches regulation in this field with its emphasis on consumer protection. However, it retains its premise of a principles based regulatory approach, and is not overly prescriptive in demanding the provision of information by those seeking investment (whether peer to peer lending or securities based). The FCA has overlaid crowdfunding onto its existing regime. It does so by:
- development of a new designated investment, a P2P agreement, a loan of less than £25,000 from one party to another, otherwise than by way of business; and
- utilisation of ‘non-readily realisable investment’, as the generic term for unlisted equities and debt securities.
What do peer to peer loan platforms need to do
A big cause of concern is what happens to loan administration in the event that a platform fails financially. Firms are required to put arrangements in place to enable administration on a failure of a platform. These may include arrangements for another platform to take over the administration, or holding sufficient collateral to cover the cost of management and administration of the loan book at the time of failure while that is wound down.
Firms, for the first time, will be required to hold appropriate financial resources, and from 1 April 2014, this will be the higher of £20,000 and a percentage of loans made (0.3% of the first £50 million, 0.2% of the next £450 million and 0.1% of loans over £500 million). From 1 April 2017, the minimum financial resources requirement will be £50,000.
Those firms which hold a consumer credit licence need to have applied for an interim permission by 1 April 2014. This is a relatively straightforward procedure requiring a notification to the FCA and payment of a fee.
What do securities crowd funding platforms need to do?
The main impact of the new rules is that limitations may be placed on those who offer financial promotions which offer non-readily realisable securities. Notwithstanding that a firm may be authorised and therefore able to approve financial promotions for a wide distribution, the nature of crowdfunding platforms means that crowdfunding financial promotions may be offered only to:
- professional clients;
- advised retail clients;
- corporate finance and venture finance contacts;
- self-certified high net worth and self-certified or certified sophisticated investors;
- retail clients who certify that not more than 10% of their net investible financial assets are invested in non-readily realisable securities.
The latter category was flagged in the consultation paper and represents a relatively innovative approach to the issue by the FCA. Additionally, prior to offering services to any client an appropriateness assessment must be made.
The requirement that any promotion must be fair, clear and not misleading does not change through the new rules. Notwithstanding the limitations placed on promotion of direct offer financial promotions to these limited classes of persons, the FCA will still expect financial promotions to meet the requirements of COBS.
Financial Servies Compensation Scheme (FSCS), Financial Ombudsman Scheme (FOS) and client money
Both P2P agreements and non-readily realisable investments remain outside the scope of the FSCS. Firms will however be in the client money regime, and will be subject to the FCA rules on customer complaints; complaints may be escalated to the FOS.
Is it all change on the bus?
In effect, a well run and properly administered platform will be undertaking most of the client facing requirements as it is, and we would not expect significant changes to be made to the mode of operation or the target investor base. However, it is worth companies considering their position in the light of the new rules through an audit of their operations and processes.
DWF lawyers have acted for issuers of non-readily realisable investments for a considerable period of time and are well versed in the regulatory regime surrounding this. In addition, we have acted for crowdfunding platforms, looking at the inception of documentation, ongoing operations and ultimately disposal of platforms to those seeking entry to the market.
If you have any questions or would like more information please contact Richard Tall, Partner, Corporate or Joanne Hall, Associate Partner, Regulatory.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.