Mad Money #65 - Must Try Harder

 

Remember those school reports? Must try harder is probably a familiar phrase from those days. In the case of my own school reports this was one of the nicer comments I used to receive.

We hear a lot about crowdfunding, however it’s all still pretty young and new. And, like any new school kid, it too is starting to see some school reports coming in. In this case the teacher concerned is the Financial Conduct Authority, the body charged with this area of financial regulation. This particular beak is less equipped with a cane and much more a very sharp set of teeth.

Most of the loan and equity based crowdfunding sites have some form of FCA approval. So far, the best that these can be are interim approvals as the FCA is monitoring the development of crowdfunding before it can even decide what full approval looks like. In fact some platforms don’t even have this as they receive their approval by working through existing approved organisations.

The FCA is to be applauded for ‘risking’ a light set up like this in order to encourage a burgeoning market to develop. This contrasts with the USA where proper equity crowdfunding still does not in reality have an operating regulatory framework.

The FCA is not simply sitting back and letting it all happen. It is watching closely and is now consulting widely about what changes to make. This has come to the industry very much in the form of a mid-term report – and the beak is clearly not happy.

The clue of course is in the questions on which they are asking for feedback. Let me quote the statements they have used to set the context for equity based platforms:

“It is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings

It is difficult for investors to assess the risks and returns of investing via a platform

Financial promotions do not always meet our requirement to be ‘clear, fair and not misleading’, and

The complex structures of some firms introduce operational risks and/or conflicts of interest that are not being sufficiently managed”

If I heard my teachers going around making comments like this, I’d be pretty worried about what sort of homework or detention was coming my way.

Loan based crowdfunding actually includes the lion’s share of the market and is naturally a major focus for the FCA. In their consultation they talk about “risks to investors that are not adequately disclosed and may not be sufficiently understood by investors.”

And they even challenged some firms to improve their client money handling standards.

This is pretty scary stuff indeed. However this is still just a call for comments and the FCA has a lot more work to do before we see changes in the rules and potentially in legislation. But if I were running a platform I think I’d be expecting to see stricter rules about just who is competent, ie who can properly assess the risks, to use crowdfunding. Just what is a ‘Sophisticated Investor’ and how easy is it to claim to be one?

Much more detailed risk disclosures would appear likely along with measures to ensure investors can compare apples with apples.

And I’m pretty sure that there will be tonnes of bricks coming down on platforms who don’t conform and provide basic due diligence.

Now of course this is the scary wing of the crowdfunding revolution, much of what it does is great and is transforming some really good companies. Investors might even make some money out of it.

But then school reports were always like that. They threatened dire consequences to make us buck our ideas up a bit but when it came to the final exams most of us managed to do alright.

I look forward to seeing Crowdfunding’s final exam results!

Alan Watts is the Director of Halo the Angel PLUS Network run by Catalyst Inc (formerly the NI Science Park).