Taking stock of the current reviews into the Crowdfunding market

Jake Wombwell-Povey, Founder of Goji, dissects what new regulations could mean for alternative finance firms in the wake of London Capital & Finance and Lendy's failures.

Jake Wombwell-Povey is the founder of Goji, a digital lending platform used across the alternative credit space.

The crowdfunding industry has spent 2019 preparing for the FCA’s new crowdfunding rules, but in the background, after two platform failures in the bonds and P2P space respectively, a series of reviews have been launched which will look into the industry and their impact shouldn’t be underestimated. Firms shouldn’t underestimate the scrutiny to be placed on them as these reviews are undertaken. 

In January 2019 London Capital & Finance (LCF), an FCA-authorised firm that was alleged to be mis-promoting mini-bonds, was put into administration by the FCA. LCF used 25% of investors’ funds to cover marketing commissions and invested the remainder into projects that failed to produce an adequate return - 14,000 investors have lost in excess of £236m.

Adding to the confusion, there is no accepted definition of a mini-bond and the FCA applies the term broadly. One can draw a distinction between non-transferable and unlisted bonds (mini-bonds, the promotion of which is unregulated), and transferable, unlisted bonds (Crowdbonds). This is important because LCF was a regulated firm but undertaking the unregulated activity of promoting mini-bonds. However, there are FCA regulated firms who promote Crowdbonds and these firms are likely to be caught under a review into the retail bond market providing angst for both firms and investors.

Shortly afterwards the collapse of LCF, P2P property platform Lendy was also put into administration. As a recent article commented, Lendy demise is controversial because it’s alleged the FCA was aware of issues before granting Lendy authorisation and many investors feel misled as a result. 

So, let’s recap the reviews that are underway and have a brief look at how they are likely to impact the sector. 

1. FCA reviews:

   1. The investigation into London Capital & Finance in conjunction with the SFO

   2. An investigation into the collapse of Lendy and the events leading up to its collapse

   3. Review of financial promotions in the crowdfunding sector

   4. Review of regulated firms issuing debt-based securities

   5. Review of P2P Property Lending

2. Gloster review: an investigation approved by HMT into the failure of LCF

3. HMT policy review: into the questions raised by LCF looking at:

   1. Policy concerns around mini-bonds, including financial promotions, investor protections and the role of mini-bonds in the economy.

   2. Assessment of the IFISA rules including the administration of the IFISA

4. HMT IFISA market review: into how the market for IFISAs has developed since 2016 to ensure the rules are suitable for future market developments.

There are two notable macro-themes emerging; the policy questions around the regulatory perimeter, and, questions regarding the effectiveness of enforcement. 

Whilst the FCA is legitimately concerned about whether crowdfunding is suitable for retail investors it is important the possibility of losses remain in any competitive system. Meanwhile, a less controversial goal is simply to ensure Regulators are enforcing existing regulation properly; HMRC not noticing non-ISA eligible bonds were being promoted and the FCA not closing fake comparison websites needs to be addressed. Reviewing the prospectus, fee disclosure and financial promotion regimes may also be required but regulators are likely to want new rules to reduce the appearance of their own culpability. However, the numerous reviews underway will be putting the Regulator under the spotlight and so the industry should expect additional scrutiny and supervision. It is notable that the FCA’s CEO has had a bonus next year linked to the FCA’s handling of these reviews.

So what is the impact likely to be?

At an industry level, all authorised firms’ financial promotions will be under scrutiny whilst firms looking for authorisation are likely to be subject to delays. The pressure in the P2P sector is likely to fall on property platforms, many of whom have already received FCA visits. Meanwhile, in the Crowdbond space th,e FCA will be looking into product and security arrangements and to provide clarification as to the regulatory perimeter.

All firms should expect inquiries from HMRC regarding their ISA administration expect inquiries from HMT regarding the investors and borrowers who are benefiting from the IFISA.

On the same day as the FCA’s crowdfunding rules come into effect, the Senior Manager and Certification Regime (SMCR) comes into force for non-banking firms. This is also likely to impact firms and the FCA, keen to show that they are not taking any chances following the recent collapses in the sector, will be taking enforcement of SMCR seriously. The only reprieve for the industry is the knowledge government has Brexit back at the top of its agenda with Boris Johnson as Prime Minister. Otherwise, the onslaught would be even worse.

Jake Wombwell-Povey is the founder of Goji, a digital lending platform used across the alternative credit space.