Consumers who use crowdfunding websites are to be given a 14-day cooling off period and other forms of protection under proposed new rules announced by the Financial Conduct Authority (FCA).
Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. The regulator will police two distinct areas of the sector: peer-to-peer (P2P) lending and investment-based crowdfunding.
While the FCA already regulates the investment-based area of the market (where people invest money in small business ventures, usually in return for an equity stake in the business or for a promised return when the business turns a profit), it will take responsibility for the P2P sector from April 2014.
The FCA has proposed that people who lend or borrow via a P2P lenders to receive clearer information about the business in which they are investing. They will receive explanations of the key features of the loans as standard and P2P websites must perform assessments of the creditworthiness of borrowers before granting credit.
Moreover, crowdfunding sites must have plans in place to ensure loan repayments continue even if a crowdfunding company collapses. Plus, the 14-day cooling off period will be introduced, allowing borrowers and lenders to withdraw without penalty from the agreement if either changes their mind.
Risk vs reward
Christopher Woolard, the FCA's director of policy, risk and research, said: "Consumers need to be clear on what they're getting into and what the risks of crowdfunding are. 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."
The FCA has also proposed new rules for investment-based crowdfunding, which it already regulates. It wants this type of investment to only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses.
The proposed rules can be read in more detail at the FCA's own website.