FCA over-regulation of crowdfunding ‘harms small companies’

The City regulator’s approach to the crowdfunding industry risks costing the economy billions of pounds in “lost investment” and choking off finance to small companies, the government has been warned.
Britain is losing out on a “significant source of sustainable economic growth” because Financial Conduct Authority reforms are deterring prospective investors from taking any risks, the UK Crowdfunding Association said.
In a letter to Tulip Siddiq, the City minister, the group called for an independent review of small business finance as it complained about the “unprecedented pace of regulatory change” for such platforms which attract retail investors.
The association represents more than 20 platforms providing equity and debt-based crowdfunding investments, which often provide finance for small and medium-sized companies via investments from the public.
Bruce Davis, chairman of the association, wrote that the “UK is now seen as having one of the most highly regulated markets for this type of investment in the world”.
Amid concerns over various aspects of the industry and a series of scandals, the City regulator has implemented a wide ranging package of reforms. These include risk warnings; the banning of “inducements” to invest; the introduction of “frictions” to ensure investors don’t rush into making decisions; and tougher “appropriateness” tests which block investors who fail to answer questions correctly.
These tests in particular are understood to have significantly reduced the ability of crowdfunding platforms to recruit new investors and made it harder for client companies to raise funds.
The regulator feels that the series of platform failures among loan-based providers could have contributed to investor sentiment towards the industry.
However, parts of the industry feel that responsible platforms are unfairly paying the price of previous regulatory failings and platform collapses.
The group warned that while regulated investment platforms were suffering, there had been a “visible increase in unauthorised or unregulated investment offers which have proliferated”.
“The association has repeatedly called upon the regulator to carry out a review of the relative costs and benefits of the current regulatory framework to provide the means to develop a more proportionate regime which balances the need for a vibrant investment ecosystem and the right level of consumer protection,” Davis wrote.
The changes have resulted in higher marketing costs for raising money and attracting new investors, the group said “which in some cases have become uneconomic and left platforms reliant on the existing investors”.
The letter, seen by The Times, said there was evidence of companies which previously raised millions of pounds through crowdfunding platforms considering using “European Union jurisdictions to avoid what were perceived as excessive costs, uncertainties and barriers to capital raising,” in the UK.
The group also complained that the regulator had made “no progress” against a target to reduce the number of consumers with “higher risk tolerance” who are holding more than £10,000 in cash. The number of adults with significant cash holdings is “in fact increasing rather than decreasing”, the letter reads.
The group said this was cutting off up to £16 billion worth of finance for SMEs.
A Treasury spokesman said: ““We are committed to ensuring retail investors have access to financial markets, while also making sure that appropriate consumer protection measures are in place.
“The UK continues to be a world-leading capital markets hub, and has raised more equity capital than the next three European exchanges combined.
An FCA spokeswoman said: “We’ve shown we’re up for a greater risk appetite, not least far-reaching listing reforms and forthcoming proposals on support for people so they’re more confident investing. We’d encourage people to take part in the open discussion on risk we’ve called for.
“Greater investment risk can benefit people through higher returns. But we also need to be clear that it comes with greater risk from investments performing not as expected.”