Name
Global FinTech Guide
Country _ Name
United Kingdom
SectionTitle
Crowdfunding / crowdinvesting / crowdlending
Body
FinTechs belonging to this category operate crowdfunding, crowdinvesting and crowdlending platforms on which money is raised to invest in various projects, mainly start-up companies and real estate projects.

Crowdfunding is not a defined financial service, but generally used to describe donation-based crowdfunding (the investor donates the money to the project), reward-based crowdfunding (the investor receives an often symbolic consideration for his investment), equity-based crowdfunding (crowdinvesting: the investor participates in the profits of the financed project or acquires shares or debt instruments) or lending-based crowdfunding (crowdlending: the investor is reimbursed at the end of the project with or without interest).

Introduction

Attitude of the country towards crowdfunding, crowdinvesting and crowdlending platforms

The crowdfunding market has grown rapidly in the UK in recent years, although the momentum in growth has reduced. Although the FCA supports the development of the crowdfunding market, with the potential to improve competition and provide alternative sources of finance, it recognises that loan-based and investment-based crowdfunding are high risk activities and have warned consumers of the risk of losing their money (https://www.fca.org.uk/crowdfunding). 

In July 2021, the FCA wrote to equity crowdfunding firms to warn them that it considers that too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. The FCA has also given similar warnings to Loan based Peer to Peer (“P2P”) crowdfunding platforms.

The collapse of several crowdfunding platforms has led to greater regulatory scrutiny. However, this may merely reflect the growing maturity of a relatively new and innovative market sector. 

Legal affairs

Obligations and requirements to provide crowdfunding, crowdinvesting and crowdlending platforms described above

Investment-based and loan-based crowdfunding (peer-to-peer) lending are regulated activities under FSMA which require FCA authorisation.

Donation-based and rewards-based crowdfunding are not expressly regulated, although Payment Services activities in connection with these platforms may be regulated.

Investment-based crowdfunding platforms are regulated in essentially the same way as asset and portfolio management platforms, requiring FCA permissions for arranging deals in investments, and possibly advising on investments, safeguarding and administering investments and receiving or holding money for clients. Please see above regarding application fees, etc.

Peer-to-peer lending platforms fall within their own, specific regulatory category of operating an electronic system in relation to lending. The FCA application fees for authorisation are £5,000. The capital requirements for a Peer-to-peer lending platforms vary by reference to various factors, and may be anything from around £5,000 to into the hundreds of thousands of pounds. 

Firms must also be aware that the restrictions on financial promotion under FSMA may also be applicable.

The rules applying to crowdfunding include: 

  • Only targeting clients who are high net worth or sophisticated investors, or who fall within other exempt categories.
  • Clients confirming that they will invest less than 10% of their net assets in a specific security.

Other regulations which apply include the consumer protection rules, anti-money laundering laws, and data protection provisions if personal information is being received. For crowdfunding firms seeking to issue shares, the Prospectus Rule
s and Listing Rules may also apply (unless the issue falls within one or more of the exemptions to the rules). 

The UK Crowdfunding Association has a code of conduct for both regulated and unregulated firms to abide by if they are a member. 

The UK’s financial promotions regime also applies, and firms are only allowed to promote crowdfunding offers to certain types of investors such as high net worth individuals and sophisticated investors.

Additional comments regarding the legal situation for crowdfunding, crowdinvesting and crowdlending platforms or what FinTech’s must be aware of in this business area

Consumers who invest via investment-based or loan-based crowdfunding platforms are not protected by the Financial Services Compensation Scheme (https://www.fca.org.uk/financialservicescompensationscheme). 

Economic conditions

Market size for crowdfunding, crowdinvesting and crowdlending platforms and biggest companies in this business area

The estimated size of the UK equity crowdfunding market is £333 million (2020). Annual growth in the sector has slowed, and currently is about 3% - 4%. Two platforms dominate the equity crowdfunding market – Crowdcube, with an estimated market share of over 50% (by number of deals) and 47% (by funds raised), and Seedrs with 44% (by number of deals) and 48% (by funds raised). 

The estimated size of the UK peer to peer lending market for new loans is about £285 million. The sector is growing at about 12% a year (but with a marked decreased of 35.4% in 2019).

  • Loan-based crowdfunding platforms include Funding Circle, Circle UK, Ratesetter and Zopa. 
  • Investment-based platforms include CrowdCude, Seedrs and Syndicate Room. 
    Whilst the market breakdown for crowdfunding FinTech’s is not expressly discernible, see 1.a.i for a more general overview of the FinTech sector. 

Additional comments regarding the economic situation for crowdfunding, crowdinvesting and crowdlending platforms or what FinTech’s must be aware of in this business area

In March 2021, a proposed merger between Crowdcube and Seedrs was abandoned when the UK’s Competition and Markets Authority investigation found that the merger would reduce competition and innovation.

In January 2020, the FCA banned the promotion of “mini-bonds” (illiquid debt securities) to retail consumers (except for sophisticated or high net worth investors) followed the collapse of several mini bond issuers. This resulted in a reduction in activity for some crowd funding platforms. 

Several peer-to-peer lending platforms collapsed between 2018 and 2021 (such as Collateral, FundingSecure, Lendy, MoneyThing and The House Crowd), which increased concerns about the peer-to-peer debt funding model and the level of credit risk analysis expertise of participants in the market.

Other lenders (such as market leaders Funding Circle) have moved away from consumers to institutional lenders as a source of funding.
 
Certain lenders have established market niches, such as property development lending, or for season ticket loans.

The UK Government recognised the advantages of loan-funding platforms as an easy, quick and efficient way of making available certain credit initiatives during the Covid pandemic (the Coronavirus Business Interruption Loan Scheme (“CBILS”) and the Recovery Loan Scheme).

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