Follow the crowd
On 1 April 2014, the FCA assumes responsibility for the regulation of consumer credit, including specific rules relating to crowdfunding – a recognised and increasingly popular source of consumer credit.
Crowdfunding regulation must be tackled from the perspective of both the lender and the borrower, because it brings together those with money to spare and those who want to borrow it. This month we’ll focus on the perspective of the lender.
Loan-based crowdfunding platforms are currently regulated by the OFT but, although the activities of investment-based crowdfunding platforms come under the FCA definition of ‘arranging deals in investments’, there is little regulatory protection for the investors.
Some investment-based crowdfunding models represent moderately low-risk for the investor ; with others, 100% capital loss is more likely than not. More robust rules and guidance are required to ensure that investors understand the risks they are taking and the extent of the potential losses.
Consultation Paper CP 13/13 details the FCA’s proposed regulatory approach to crowdfunding from the perspective of the investor. Proposals include extending the restrictions currently placed on the marketing of unregulated investment schemes to investment-based crowdfunding platforms, and restricting potential investors to:
- Certified ‘sophisticated investors’;
- Self-certified high-net-worth investors;
- Retail clients who receive regulated investment advice from an authorised person; or
- Retail clients who restrict investment into unlisted shares or unlisted securities to a maximum of 10% of their net investible portfolio.
Where advice is not provided, firms will still have to assess the suitability of such investments to ensure that only those with the knowledge and experience to understand the risks are permitted to invest. The proposed new rules will increase the regulatory burden on operators, but it is hoped that this will not stifle the burgeoning crowdfunding industry.
Suffer not the unclean
Prompted by the FCA’s ruling in April 2013 that platforms will have to stop accepting commissions from fund managers (currently bundled into fund charges), and HMRC’s decision to tax rebates to clients, platforms are to convert funds to ‘clean fee’ share classes which do not pay kickbacks to advisers, platforms or clients.
However, in Guidance Consultation CG13/7, published on 23 October, the FCA states that a conversion should only take place if it is in the client’s best interests. The FCA affirmed that it expects the clean unit class to be exactly the same as the pre-RDR class, only with reduced annual management charges. However, the guidance clarifies that if this is not the case, and the client is in any way disadvantaged by the conversion, it should not take place and that platforms must give clients the opportunity to opt out of the switch, rather than simply bulk-converting all clients without giving them any say in the matter.
A number of providers have confirmed that the cost is sometimes higher, particularly for low-value investors, with the clean fee share class than with their bundled counterpart, usually as a result of providers being forced to accept a lower margin payment on many funds in order to stay competitive.
The clarification has been welcomed by the industry; most providers were already of the view that platform-wide conversions to clean share classes would not always be in the best interests of all customers. The FCA’s has now demonstrated that should a client not be satisfied with a conversion, it does not have to take place and that the best way to address the issue of moving assets is to put it in the control of the advisers themselves. This is the FCA practising what it preaches: “Making sure that relevant markets work well so that consumers get a fair deal”.