The alternative finance industry typically distinguishes between crowdfunding and peer-to-peer lending, inasmuch as crowdfunding investors typically take an equity interest in businesses, whereas peer-to-peer investors lend money to individuals and/or businesses. However, the FCA refers to both of these as crowdfunding, which it divides into loan based crowdfunding and investment based crowdfunding.
- Loan based crowdfunding is what is more commonly know as peer-to-peer lending.
The loans are specified investments, which means that any promotion of these investments to retail clients who are not high net worth, sophisticated or advised must be issued or approved by an FCA authorised firm.
Operating a peer-to-peer platform became a regulated activity on 01 April 2014, having previously been within the perimeter of the Office of Fair Trading. Currently platform operators must either be fully authorised and regulated by the FCA with permission for operating an electronic system in relation to lending, or they can be operating under interim permissions while their full authorisation is being processed. However invoice financing is not a regulated activity so can be carried out by unregulated firms.
As operating a peer-to-peer platform is now a regulated activity, platform operators have to comply with the FCA’s Conduct of Business rules and many other requirements including keeping a minimum amount of liquid reserves. Investors also have access to the Financial Ombudsman Service and the Financial Services Compensation Scheme (FSCS). From 09 December 2019, direct offer promotions (promotions that specify a manner of response, such as an application form) of peer-to-peer loans to retail clients cannot be made unless the client is high net worth, sophisticated or a restricted investor. A restricted investor undertakes not to invest more than 10% of their net assets in peer-to-peer loans to retail clients cannot be made unless the client is high net worth, sophisticated or a restricted investor (spanning 12 months before and after investment the point of investment).
- Investment based crowdfunding involves investors purchasing securities (e.g. shares and bonds) issued by companies.
These investments are non readily realisable securities (NRRS), unless the securities are traded on a regulated venue and can be readily valued and realised within 30 days. Just as with peer-to-peer loans, direct offer promotions of NRRS to retail clients cannot be made unless the client is high net worth, sophisticated or a restricted investor. A restricted investor in this case must undertake not to invest more than 10% of their net assets in NRRS (spanning 12 months before and after investment the point of investment).
Unless the securities are made available to investors through a platform operated by an FCA authorised firm (a requirement for the securities to be held within an ISA wrapper), there may not be an FCA authorised firm involved with the investment. In such a scenario, as the issuance of securities is itself not a regulated activity, investors may not have access to the Financial Ombudsman and the FSCS (although, where advice has been given, claims against an FCA authorised adviser may be considered).
From 01 January 2020 to 31 December 2020 the FCA has introduced a temporary intervention on the marketing of speculative mini-bonds to retail investors. For the 2020 calendar year, speculative mini-bonds can only be marketed to retail investors if they are high net worth or sophisticated investors. Speculative mini-bonds are defined as as unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property. However, the temporary intervention does not apply to companies using unlisted securities to buy or construct property used for their own commercial or industrial purpose. Nor does it apply to investment vehicles that only invest in a single UK-based property.