Financial watchdogs want to update the rules about crowdfunding to better explain the risks to investors.
The move follows a review of the loan and equity based crowdfunding market.
The Financial Conduct Authority (FCA), which supervises fair play for consumers dealing with financial firms, has flagged several concerns that they say are unfair to investors.
The watchdog will continue scrutiny of the market and hopes to draft several proposed rule changes in the spring of 2017.
Investors need more transparency
In general, says an interim report, investors reported that they:
- Cannot compare platforms or how crowdfunding deals stack up against other investment products
- Find working out the risks and returns of an investment too difficult
- Claim some deals are misleading
- Complicated deals are not managed to reduce risk or conflicts of interest
The FCA also had specific concerns about loan-based crowdfunding:
- The risk of some deals is not properly explained or understood by investors
- Some crowdfunders do not have plans in place to run loan books to maturity if they should wind down
- Some platforms must improve client money protection arrangements
The watchdog also wants to upgrade the underwriting standards of peer-to-peer lenders to those that govern mortgage lending.
The current financial standards for crowdfunding platforms were introduced in April 2014.
More protection for crowdfunding
FCA CEO Andrew Bailey said: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers.
“Based on our findings to date, we believe it is necessary to strengthen investor protection in several areas. We plan to consult next year on new rules to address the issues we have identified.”
The UK Crowdfunding Association (UKCFA) argues the sector needs better enforcement of the current rules rather than a new set of measures.
“We have long been advocating for clarification of the rules defining loan crowdfunding so look forward to working with the FCA on refining those rules while being mindful of the need to balance the need to promote competition and ensure investor protections are proportionate to the risks,” said a statement.
The UKCFA web site also explains that most investors have no protection for crowdfunding deals that go wrong from the Financial Services Compensation Scheme.