The UK’s Financial Conduct Authority (FCA) has indicated that it will tighten up regulation of the burgeoning crowdfunding industry, of which real estate lending is an increasing sub-sector.
The FCA this morning (9 December) gave an update on the review of the rules which it put into force in April 2014.
The watchdog has proposed additional rules surrounding requirements for the content and timing of disclosures by both loan and investment based crowdfunding platforms to ensure that investors are fully aware of the risks.
For loan-based crowdfunding, the FCA intends to consult on strengthening rules on wind-down plans, additional restrictions on cross-platform investment and extending mortgage-lending standards to such platforms.
A report published this week by the Investment Property Forum (IPF) showed that the global crowdfunding market, across all types of debt and equity platforms, is estimated to have reached $145.29 billion by the end of 2015, growing by 1,160 percent in the two years from the end of 2013. The CRE debt crowdfunding market stands at $7.2 billion globally, the research showed.
In Real Estate Capital’s Weekly Digest, published yesterday (8 December), Brenna O’Roarty, the author of the IPF report said that real estate debt-based platforms have the potential to disrupt the wider property financing market as they become more established and as regulation is tightened up.
“Fintech is blurring the boundaries as it moves towards the established playing field,” explained O’Roarty. “Rationalisation of fee structures and more detailed reporting to investors creates more accountability.”
However, the FCA said today that, under the current rules, it is difficult for investors to compare platforms with each other and to compare crowdfunding with other asset classes due to the complex and often unclear product offering. It added that it is difficult for investors to assess the risks and returns of investing.
Specifically singling out loan-based platforms, the FCA said it is concerned that certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors.
The plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity, the regulator added.
“Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers,” commented Andrew Bailey, chief executive of the FCA.
“Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified,” Bailey added.