Crowd-Funding Sites Will Be Forced to Boost Capital by U.K.

Crowd-funding websites that encourage people to loan money to small business would be forced to meet minimum capital requirements under draft plans proposed by British regulators.

The U.K. Financial Conduct Authority said it plans to phase in the capital rules by April 2017, as it bids to boost consumer protection standards and extend the scope of its regulatory net over the crowd-funding industry. The FCA already regulates sites that encourage people to take equity stakes in small businesses.

“Crowd funding is the market’s response to banks’ under-lending and the FCA must be careful not to over-regulate this important source of alternate finance,” Simon Morris, a regulatory lawyer at CMS Cameron McKenna LLP in London, said in an e-mail.

Crowd-funding sites face tougher scrutiny from authorities on concerns that the growing industry could lead to market abuses that are outside the traditional reach of regulators. Michel Barnier, the EU’s financial services chief, said earlier this month that he’s weighing the need for a “single European framework” for crowd-financing services.

“Some protection is required and the FCA’s plans appear broadly proportionate,” Morris said. “But the FCA must ensure that its planned licensing regime for loan-based crowdfunding does not overburden legitimate operators or deter lenders through excessive red tape.”

The crowd-funding market is worth about 360 million pounds ($582 million) in the U.K., according to FCA data.

Behave Responsibly

“Peer-to-peer lenders have been pressing for regulation for some time and believe it is important that all firms entering this important new market behave responsibly, treat their customers fairly and manage their risks,” Christine Farnish, chairwoman of the Peer-to-Peer Finance Association, a trade group representing crowd-funding platforms, said in an e-mail

Under the FCA plan, loan-based crowdfunding platforms would have to hold a minimum of 50,000 pounds in capital. The amount could rise in individual cases depending on the volume of loans handled on the site.

The capital would be tapped in situations where a business running a crowd-funding website goes bankrupt while processing a loan.

“Consumers need to be clear on what they’re getting into and what the risks of crowd-funding are,” Christopher Woolard, the FCA’s director of policy, risk and research, said in an e-mail. “Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding.”

Cooling Off

In the FCA’s plan, consumers would also be given a 14-day cooling off period to back out of a loan, and more information of the risks of their investment.

“Research indicates that around 50 percent to 70 percent of business start-ups fail completely,” the FCA said. “So consumers investing in such companies need to understand that it is likely they will lose 100 percent of any money invested.”

Loan-based sites are one of a number of business models in the crowdfunding industry, which also includes firms such as Kickstarter Inc. that are based on donations.

The FCA said that only equity-based and loan-based sites require regulation.

The regulator is seeking views on the plans until Dec. 19.

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