Investors will be told to put no more than 10pc of their money into high-risk “crowdfunding” websites as part of new rules, announced by the City regulator today, that could put some of these middlemen firms out of business.
Crowdfunding is where an entrepreneur – or anyone hoping to raise money – asks the public to put cash into their proposed venture.
Websites such as Seedrs.com or Crowdcube.com allow the fund-raisers to post details of their project and how investors might profit if they put in as little as ￡10 each. The middleman takes a cut for this service. Returns can be higher than 10pc, but there is a risk the business fails, leaving investors with nothing.
The new regulations laid down today will ensure “better protection” for investors from April, the Financial Conduct Authority said.
Those putting money into crowdfunding projects will have to confirm that they are not using any more than 10pc of their assets, excluding property and pensions. This is likely to take the form of a tick-box on the sign-up page. Those who declare themselves as experienced crowdfunding investors will not be prescribed any limit.
The new FCA regulations also cover so-called peer-to-peer lending, where companies such as Zopa link savers, or “lenders”, directly with borrowers in exchange for a cut of the interest. However, the FCA has drawn clear distinctions between the two different types of investing. It said peer-to-peer carries "less risk” – reflected in typical returns of between 5pc and 7pc – and so there will no prescribed “cap” for inexperienced savers.
Even so, all peer-to-peer middlemen will have to meet strict capital requirements and show detailed plans of how the loans contracts would be enforced if the company went bust.
From April 1, firms will have to show at least ￡20,000 of capital “buffer”, or more for bigger firms, to protect against financial shocks. These limits will rise from April 1 2017, when the minimum will be ￡50,000 and more for larger firms.
The reason for these rules is that investors are not protected by the Financial Services Compensation Scheme that covers up to ￡85,000 (￡170,000 for joint accounts) of savers’ money if a bank or building society goes bust.
The FCA said it expects all firms to meet these rules. Those which fail to do so will be subject to regulatory discipline, just as a bank might if it failed to meet its requirements.
Christopher Woolard, director of policy, risk and research at the FCA, said: “We want to ensure that consumers are appropriately protected – but not prevented from investing.
“We have been careful to listen to feedback from the market and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding.”
Christine Farnish, chairman of the Peer-to-peer Finance Association trade body, said: "We are pleased that the FCA is taking a proportionate approach to the regulation of peer-to-peer lending.
“Today's statement strikes the right balance between promoting innovation whilst not exposing consumers to significant risk.”