The UK Financial Conduct Authority (FCA) today published a letter outlining the harms to consumers and markets most likely to arise from Crowdfunding business models, and its strategy to address those harms.
In particular, the FCA notes that investment-based crowdfunding platforms should pay attention to:
- strengthening risk warnings
- banning inducements to invest
- introducing positive frictions including a cooling-off period, and
- improving client categorisation and appropriateness testing.
The FCA expects firms to make any changes required to meet its expectations and improve consumer outcomes.
On 12 September 2023, the FCA published its policy statement on introducing a gateway for firms who approve financial promotions. Firms should take all necessary advice to carefully consider whether they approve promotions in scope of this new gateway. Given the activity that a crowdfunding platform undertakes, it is likely that most crowdfunding platforms will need to apply at the gateway to approve financial promotions. This is because it is likely that they will be approving financial promotions that have been prepared by unauthorised persons and where the exemptions from the need to apply are not applicable.
Firms must submit an application for permission to approve financial promotions before 6 February 2024 to take advantage of the transitional arrangements. Firms applying by this time will be able to continue approving promotions until their application is determined, at which point their ability to approve promotions will be amended in line with the outcome of their application.
Should a firm decide to approve financial promotions in scope of the gateway in future (i.e. after the application period has closed), they can submit a Variation of Permission application for this in the usual way. However, they will not be able to approve financial promotions (other than within an exemption) until their application is determined. Firms that do not apply to the gateway during this period cannot approve financial promotions (aside from where an exemption applies) from 7 February 2024.
Finally, the FCA expects crowdfunding platforms to have implemented the Consumer Duty in full, which requires them to put the needs of their consumers first and deliver good customer outcomes.
FCA’s supervisory focus aligns with the Consumer Duty outcomes, for example:
- Consumer understanding: Firms need to ensure that investors fully understand all aspects of the investment they are making (e.g. 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 need to apply an appropriate level of due diligence in relation to the securities they distribute before marketing such securities to investors, to ensure an investor can select an investment with a risk profile that is aligned to their needs and avoiding foreseeable harm to them;
- Price and value: Fees and charges, to investors and fundraisers, need to be transparent and fair; firms need to have asked themselves how price and value outcomes apply to them, including what management information should be collected to assess their performance in this area.
