The UK Financial Conduct Authority (FCA) has today published a letter outlining the harms to consumers and markets most likely to arise from Crowdfunding business models and its strategy to address these harms.
In particular, the FCA notes that investment-based crowdfunding platforms should pay attention to the following:
- enhance hazard warnings
- prohibition of investment incentives
- introduction of positive frictions including a cooling period and
- improve customer categorization and eligibility screening.
The FCA expects firms to make whatever changes are needed to meet its expectations and improve consumer outcomes.
On 12 September 2023, the FCA published its policy statement on the introduction of a portal for firms that approve financial offers. Firms should take all necessary advice to carefully consider whether to approve bids within the scope of this new portal. Given the activity that a crowdfunding platform undertakes, it is likely that most crowdfunding platforms will need to apply to the portal to approve financial offers. This is because they are likely to approve financial offers that have been prepared by unauthorized persons and where the application exemptions do not apply.
Companies must apply for a license to approve financial promotions before 6 February 2024 to take advantage of the transitional arrangements. Companies applying up to this point will be able to continue to approve bids until their application is determined, at which point their ability to approve bids will be modified according to the outcome of their application.
In the event that a company decides to approve financial promotions under the portal in the future (ie after the application period closes), it can apply for a license amendment for this in the usual way. However, they will not be able to approve financial promotions (except by exception) until their application is determined. Companies that do not implement the gateway during this period cannot approve financial offers (except where an exception applies) from 7 February 2024.
Finally, the FCA expects crowdfunding platforms to have fully implemented the Consumer Duty, which requires them to put their consumers’ needs first and deliver good results for customers.
The FCA’s supervisory focus is aligned with Consumer outcomes, for example:
- Consumer understanding: Firms must ensure that investors fully understand all aspects of the investment they are making (eg its inherent illiquidity, risk of total capital loss, lack of FSCS protection) and are fully aware of the extent of due diligence undertaken by the platform?
- Products and services: Firms must exercise an appropriate level of due diligence in relation to the securities they distribute before marketing such securities to investors, to ensure that an investor can select an investment with a risk profile that aligns with the needs them and avoid foreseeable harm to them?
- Price and value: Fees and charges, for investors and fundraisers, must be transparent and fair. Companies must have asked themselves how price and value outcomes apply to these, including what management information should be collected to assess their performance in this area.