The Financial Conduct Authority (FCA) warned there was a “risk of regulatory arbitrage” under which firms not regulated to provide asset management conduct business which “looks similar”.
In a call for input on its regulatory regime around crowd funding and peer-to-peer (P2P) lending, published on 8 July, the FCA said it will explore the issue further “to understand the extent to which P2P is becoming a substitute for asset management”.
“We will wish to explore if regulation should be changed to reflect this,” it added.
Currently crowdfunding platforms enjoy lighter regulation in many aspects of their business, for instance due diligence, where they are given more flexibility than asset managers.
Crowdfunding as a market grew exponentially in recent years, with an estimated £2.7bn invested over the course of 2015, up from £500m in 2013, according to the FCA. There are now more than 100 platforms in the market or seeking authorisation, it said.
The FCA took over regulation of the market in 2014 when it became the consumer credit regulator, publishing rules for crowdfunding platforms in March that year.
It now wants to review the rules to ascertain whether they still provide adequate consumer protection considering the growth of the market.
Investment-based crowdfunding and P2P lending, which includes donation-based crowdfunding, are slightly different in that the former is regulated, making the latter more risky for investors.
There are two types of regulated crowdfunding, both largely run on web platforms. Peer-to-peer ending, or loan-based crowdfunding allows consumers to lend money in return for interest payments on the loan and eventual capital repayment. With investment-based crowdfunding, customers buy shares or debentures directly or indirectly in businesses.
The regulator pointed out a number of areas it wants to focus on in its review, including financial promotions, due diligence and prudential standards.
It will also look at whether to mandate in greater detail the disclosure firms are expected to give consumers and the time frame the disclosures must be provided in.
Finally it will look at whether platforms should be required to assess investor knowledge or experience of the risks involved in this type of investment.
The regulator pointed to the pooling of credit risk as an emerging feature in the market, which means multiple lenders are matched to a single borrower.
It noted some platforms had developed models whereby they pool risk across all lenders on the platform in the form of a shared provision fund, effectively indirectly exposing all investors to the risk of other loans.
The regulator said this type of activity meant some firms were veering close to operating collective investment schemes, without holding the right permissions.
It also pointed to the “recent development” of using crowdfunding platforms to finance real estate.
Of the £1,490m invested in business loans in 2015, £609m – around 41% – was used to finance real estate lending (such as loans to purchase buy- to-let properties or bridging finance), the FCA said quoting Nesta.
Additionally, of the £332m raised on investment-based crowdfunding platforms in 2015, some £85.7m was invested in real estate companies (which allow investors to acquire ownership of a property-asset via the purchasing of shares of a single property or a number of properties) as opposed to commercial businesses, it added.
Director of strategy and competition Christopher Woolard said: “The market has grown rapidly and we want to explore concerns that have been expressed about developments in some aspects of the market. We believe now is the right time to consider whether our requirements remain appropriate and that we have the right rules to support the development of this dynamic market by ensuring consumers are adequately protected.”
Founder of peer to peer platform Landbay, John Goodall, welcomed the move, saying the term crowdfunding was being used to describe a wide variety of products and risked misleading investors.
For instance, equity crowdfunding and P2P lending are “entirely different forms of investment” with “completely different risk profiles”, he said.
“We would encourage clearer definition of the different types of crowdfunding, particularly between the equity and debt varieties,” he added.
The FCA wants to hear firms’ views before 8 September.