Crowdfunding need financial regulations just like banks

7 March 2014

Crowd-Funding Things are changing in the world of crowdfunding and now, loan-based crowdfunding platforms will have to have capital in the vaults to put against the risk of the business, should it fail. And this is according to the Financial Conduct Authority (FCA).

Basically, if you're going to act like a financial service, then you're going to be regulated so that consumers can be protected. The FCA have released a 95 page document which details all this and you can read that here.

Investment-based crowdfunding already has regulations in place, but the regulator have updated their rules so that loan-based funding is covered too. Previously, the FCA thought loan-based crowdfunding had a "lower risk than investment-based activities", but they've changed their mind on that.

These new regulations will set "prudential requirements" and companies will now need "financial resources" to underpin their business, should things go belly-up.

The FCA created a model for calculating how much capital each business will need, which is staggered for each individual company.

"Other protections that we are introducing – such as the minimum capital standards and the requirement for firms to have arrangements in place to continue to administer loans in the event that the platform fails – should provide adequate protection at this time," the regulator said. "We do not consider that it is contradictory for these firms to be subject to some regulatory requirements but not others."

"We do not consider it appropriate to mandate specific disclosures or the form and content of those disclosures since business models vary across the market," the FCA added. "Instead, the rules require firms to consider the nature and risks of the investment, and the information needs of their customers, and then to disclose relevant, accurate information to them. The high-level approach puts the onus on firms to provide appropriate, useful information, and not to over-burden consumers with too much detail."

These new rules will come into play on 1st April.

What do you think?

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