By Ayan Mitra
Many discussions about crowdfunding lead inevitably to regulation. A chorus of Cassandras warn that without tougher legislation equity-based crowdfunding will end in tears, scandal and recrimination. What one hears less often are the opposing voices pointing out the UK has the best regulatory approach to crowdfunding in the world. Our industry is flourishing under the current regime, with businesses, investors and the economy more broadly benefitting. And that’s something of which we should be both very proud and extremely protective.
Personally, I feel we’ve got the current balance between regulation and risk right, with our country being the only one globally that’s really allowing crowdfunding to thrive. We have sensible regulation in place, plus our industry has taken a responsible approach from the outset, committing to voluntary codes of practice, such as that drawn up by the UK Crowdfunding Association (UKCFA). Among other things, these require UKCFA members to put clear water between investors’ funds and platforms’ finances, maintain transparency and ensure security over information and investments.
When formal rules relating to equity-based crowdfunding were put in place by the Financial Conduct Authority (FCA) last year it was a welcome development. It gives our industry greater legitimacy and investors more assurance. At CrowdBnk, we already employed many of the measures outlined by the FCA. We were using investment caps to manage consumer risk, an appropriateness test for potential investors was in place and we advised against investing more than ten per cent of an individual’s assets, as the rules now dictate.
As said, my view is that the combination of self-regulation and the present level of FCA legislation is working well. But we can’t take this benign environment for granted. A recent report called Banking on Innovation suggested more than a third of British politicians has no idea what crowdfunding and peer-to-peer lending are or has a poor understanding of them. And about one in five thinks we’re under-regulated.
This really matters, as these are the people devising policy. And it suggests we’re failing to communicate adequately to them how our industry works and, therefore, potentially limiting our influence over how alternative finance evolves. Crowdfunding and its peers emerged to fill the space left by the mainstream banking system, which had effectively turned its back on SMEs after the economic downturn. But we need to drive home the message we aren’t banks and don’t aspire to be. It’s inappropriate our industry should be regulated as banks are.
I’ve met many politicians who do grasp this, as well as the enormous positive benefits of the revolution in financial services being led by platforms like ours. George Osborne has talked often about the need for greater competition in business funding and he appears to recognise the great potential in fintech innovation. He’s not alone. The New Economics Foundation recently pointed out the importance of nurturing diversity in the UK’s financial system, citing innovations such as peer-to-peer lending as improving the resilience of Britain’s economy.
But the onus is on us to better articulate how we operate, the distinction between us and traditional banking institutions and our commitment to deliver on the promises we’ve made to investors so far. At CrowdBnk, we vet firms using rigorous due diligence processes, we encourage investors to create a diversified portfolio, plus we check people are fit to invest. It’s not in our interest for anyone to lose money on the deals we present to them, so we do all we can to ensure that doesn’t happen. Over the next few years we’ll start to see more exits from crowdfunded investments, so the evidence will emerge as to whether what we’re doing delivers the returns expected. My hope is overly restrictive rules aren’t put in place before we’ve had that opportunity to prove ourselves. We recognise how lucky we are to work against the current, effective regulatory backdrop - and long may it last.
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Please note: The contents of the article are the author's opinion and have not been approved as a financial promotion by Resolution Compliance Limited.