City watchdog’s ‘Dear CEO’ letter raises equity crowdfunding concerns


The Financial Conduct Authority (FCA) has written to the bosses of equity crowdfunding platforms about the key risks it sees in the market, warning that consumers are still making “inappropriate” investments despite existing marketing restrictions.

The City watchdog said that advances in technology have made investing more accessible and “too many” consumers are still investing in inappropriate, high-risk investments that do not meet their needs.

“Our rules on client categorisation (as ‘restricted’, ‘high-net-worth’ or ‘sophisticated’ investor) play a key role in protecting consumers,” the FCA said.

“We are concerned that too many consumers simply ‘click through’ this process, without sufficient verification by firms, and do not understand the risks of how they have been categorised.”

The FCA also expressed concerns that consumers may be holding more than 10 per cent of their investment portfolio in these investments, “which could pose a significant risk of harm”.

Investor marketing restrictions have been in place within the equity crowdfunding space for a number of years and similar rules were subsequently introduced for peer-to-peer lending platforms in 2019.

The FCA said that equity crowdfunding platforms must ensure that investors understand the risks and make it clear what analysis and due diligence has been undertaken on the borrowers.

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“You must be mindful of conflicts of interest between businesses who are raising money and consumers investing money,” the FCA added.

The regulator said that is will be monitoring these firms’ activities and will hold senior managers to account for their firm’s actions.

The ‘Dear CEO’ letter, which was sent out on 2 July but published today, comes as the FCA mulls tougher rules on the promotion of investments which it categorises as ‘high-risk’. This could lead to the introduction of more mass-marketing bans like the one imposed on mini-bonds.

The City watchdog’s letter highlighted appointed representatives as another area of concern. This is where an unregulated firm operates under the regulatory umbrella of an FCA-authorised firm, which assumes responsibility for their compliance.

“We are concerned that consumers may be inappropriately exposed to high-risk investments, fraud, and scams due to inadequate oversight by firms of the activities of their appointed representatives,” the FCA said.

The regulator is doing further work to address these potential harms. It said it has recently consulted on introducing a new flat fee of £250 per appointed representative to fund this additional work.

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“We will be seeking assurances from the chief executives of firms with, or seeking to appoint, appointed representatives that they have robust systems and controls to oversee the activities of their appointed representatives,” the FCA said.

The regulator’s letter cited “disorderly firm failure” as another risk. It noted that most equity crowdfunding platforms are loss making so there is a risk that firms could fail in a disorderly way, leading to the loss of customers’ money.

It underlined the need for a credible wind-down plan that includes “appropriate and timely triggers for implementation”, as well as a realistic timeframe and cost estimates.

The regulator also raised concerns around fraud and investment scams and said that firms need to have appropriate safeguards in place.


Read More:City watchdog’s ‘Dear CEO’ letter raises equity crowdfunding concerns