FCA warns equity crowdfunding CEOs of consumers making ‘high-risk’ investments


The Financial Conduct Authority (FCA) has written to the CEOs of equity crowdfunding platforms, to warn them that consumers are still making “inappropriate high-risk” investments despite the current marketing restrictions, as first reported in P2P Finance News.

The FCA said crowdfunding firms should “promote investment opportunities appropriately so that consumers can understand the risks these speculative and high- risk investments pose.”

In a “Dear CEO” letter, the FCA told the heads of equity crowdfunding platforms that: “As CEO, you are responsible for the conduct of your firm as a whole. We expect you to ensure that there is clear accountability within your senior management team.”

One of the key risks the watchdog identified was that “too many consumers are still investing in inappropriate high-risk investments which do not meet their needs” as a result of technological advancements which have made investing more accessible to the general public.

“It is important that your customers understand the risks they will be exposed to by the investments your firm promotes and the risks from how they have been categorised by your firm,” wrote Debbie Gupta, director of consumer investments supervision at the FCA.

Gupta said firms “must consider the nature and risks of the investments offered and disclose relevant, accurate information to investors so that they can make an informed investment decision”.

It was also important for equity crowdfunding platforms, the FCA said, to be transparent and clear with potential investors about what analysis and due diligence had already been undertaken on the underlying recipients of the funding so they could fully understand the risks before deciding whether to invest.

The regulator said it was also concerned about its client categorisation rules, which it said plays a key role in protecting consumers, being blithely clicked through by consumers who do not understand the full risk associated with the category they sit in. Client categorisation means consumers are labelled as “restricted,” “high net worth” or as a “sophisticated” investor. Firms, the FCA said, did not provide “sufficient verification” of such consumers.

The fact that “consumers may be holding more than 10 per cent of their investment portfolio in these high risk and speculative investments” was also a cause of concern for the regulator who said that holding over 10 per cent of their investment portfolio was “unlikely to be in the customers’ best interests”.

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

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

The publishing of the letter this week, which was originally sent out on 2 July, comes amid reports that the the FCA is considering bringing in tougher rules on the promotion of investments which it categorises as “high-risk”.

Investor marketing restrictions have been in place for several years already with similar rules introduced for peer-to-peer lending platforms in 2019 but the FCA said it will monitor firms’ activities on an “ongoing basis” and hold senior managers to account for their firm’s actions going forward.


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