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Chris Davies: Why you should be considering crowdfunding

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A revolution in financial services is underway. We are seeing a genuine investor led revolution, or should we say a ‘democratisation’ of ways to invest and raise finance.

The fact that small businesses continue to have difficulty in raising finance and bank and building society returns remain low, crowdfunding is now becoming a popular method for business owners to raise capital for their business interests or selling equity to a number of investors.

Indeed with a recent study suggesting that whilst the five high street banks provide 90 per cent of SME loans, giving little incentive to innovate their services, the crowdfunding sector could account for £12.3bn of annual loans. This, along with the PRA reducing its capital reserve requirements, means we could see crowd funding advice models taking off in a similar fashion to Metro Bank’s entry onto traditional high street banking.

What does this mean for the adviser or planner community?

Well, the fact that the consumer credit market transfers will transfer from the Office of Fair Trading to the FCA on 1 April, regulating loan based crowd funding sets a precedent in bringing conduct of business regulation under a single regulator, ending duplication for firms and potentially ending confusion for consumers.

We also already have 27 business finance platforms (67 including socially responsible and creative-arts sectors).

So the FCA, in its recent consultation paper 13/13, has identified five types of crowdfunding in relation to regulation:

  1. Exempt: Using investments that already qualify in statutory exemptions such as Enterprise Investment Schemes
  2. Reward: People give money to receive a service or product (e.g. a book, computer game or event invitational) – Non regulated
  3. Donation: Support enterprises or firms activities or services – Non regulated
  4. Investment: People invest either directly or indirectly in new or established businesses via shares, debt securities or unregulated collective investment schemes 
  5. Loan: Lending to individuals or firms in return for interest payments and repayment of capital over time (Not business-to business loans.

It is worth also pointing out the obvious that the FCA will regulate those firms who operate crowdfunding whilst carrying out regulated activity.

We now have a consumer driven innovation where alternatives to traditional banking and investing are being tried and tested. We see a genuine desire for fair, more transparent and easier ways for transacting finances, yet there is the need to ensure consumers are protected and they and the market participants are aware of all associated risks. Enter the financial planning professionals.

It looks as though this market will be open to those that agree to seek advice from an authorised person, or who certify they are sophisticated investors and to those who can confirm that this will only be 10 per cent of their investable portfolio.

Where no advice is being given then appropriateness tests will still need to be conducted to ensure clients are assessed as having the knowledge or experience to understand the risks involved.

Adviser firms who are targeting niche markets and offering specialist services will be stronger and more attractive to their clients if they gain a comprehensive understanding of this alternative market and offer knowledge and guidance in this arena. This also will protect and strengthen their advice and/or planning process. 

Whilst balancing the regulation and associated risks with a relatively new market, we are seeing real enterprise with new firms such as IW Capital funded Money & Co chaired by Philippa Horlick and Bank to the Future, co-run by Simon Dixon, who both see huge opportunity in allowing entrepreneurs and investors the opportunity to gain alternate routes for funds and potential higher interest rates.

If anyone has watched with joy Dave Fishwick’s ‘Bank of Dave’ open in Burnley and operating (with great success) a local community bank that harks back to the era of your local, friendly bank manager looking you in the eye and shaking on a loan based on judgement and trust, then this is an area for you to get involved with.

Chris Davies is managing director at Engage Insight

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I have remarked on this before.
    1. Is it covered by the FSCS – no
    2. Is it high risks – yes very – almost off the scale.
    3. If you want to give to charity, that’s one thing. But investing is a serious business. It isn’t a game or a social activity. It’s there to make the investor money, either by increasing capital or providing income. Whether crowd funding will do either is highly questionable.
    4. I wonder what your PI insurer will think when you come to renew and he asks whether you have been involved in this sort of thing.
    5. By pure logic if a small firm is any good or its proprietors have any assets, normal funding should not be a problem. It seems to me that this method of capital raising is for firms who have either a poor proposition or have men of straw starting them. I have started businesses and have advised clients doing the same and this sort of thing didn’t exist and firms were started notwithstanding. So why now?
    6. If I am going to put my or my clients’ money into such ventures I would want equity. Have you noticed that even in Dragons Den they don’t actually splash the cash without taking a significant slice of the firm?
    7. I’m afraid the whole thing seems to me to be on the shakiest of ground and anyone getting involved better have a huge lexicon of caveats to hand.
    8. From the potential borrowers’ standpoint – what sort of interest will they be paying? If lenders get a reasonable return for the risk premium we should be looking north of 14% – who would be daft enough to borrow at those rates? Certainly not an astute business person – which brings us full circle.

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