UK Crowdfunding regulation and market information
Alternative finance is a fast growing segment of the financial services sector. Within the whole of Europe, more and more platforms arise as a result of the economical crisis. In many countries the concept of alternative finance is fully integrated. In particular the UK is very developed in this concept. The UK is seen as by far the biggest and most developed market in Europe with still a lot of potential for new players. There are already many existing alternative finance platforms which have raised an amount of more than 2.3 billion(!) euro’s in 2014 alone! In this article we will be talking about the UK crowdfunding regulation and market.
The alternative finance market consists of a few different types of funding. The main types of funding are; loan-based crowdfunding, investment-based crowdfunding, reward-based crowdfunding and donation-based crowdfunding.
FCA’s Crowdfunding regulation
So how is it regulated in the UK? The alternative finance market is regulated by the FCA since April 1st 2014. It is mainly focused on the 2 following types of crowdfunding; loan-based crowdfunding and investment-based crowdfunding.
Loan-based crowdfunding platforms are platforms on which people lend money to individuals or businesses in the hope of a financial return in the form of interest and the repayment of capital (this excludes some business-to-business loans). The following rules apply to loan-based crowdfunding:
- A minimum capital is required for the operator of the platform
- Either a percentage of the volume of loaned funds
- Or a fixed minimum of £50000 (until April 2016 à £20000)
- The investor and/or borrower must be a partnership consisting of two or three persons not all of whom are bodies corporate, an individual, or an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership.
- Firms will not fall within the remit of Financial Services Compensation Scheme (FSCS). However, the firm will hold his money as a trustee and such monies must be held subject to the FCA’s client money rules.
- Information about the platform must be disclosed and advertised so customers know with whom they are dealing with.
- Platforms must have plans in place so that loan repayments continueto be collected even if the online platform gets into difficulties.
- Any promotions (such as print; broadcast or online advertising) must befair and not misleading and, if inappropriate, can be banned by the FCA.
- Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
Investment-based crowdfunding are platforms on which consumers can invest in established or new businesses in return for equity.
- In the retail market, firms can only promote their platform to
- Sophisticated investors, high net worth investors, retail clientswho receive regulated investment advice or investment management services from an authorized person; or
- Retail clients who certify that they will not invest more than 10% of their portfolio (i.e. excluding their primary residence, pensions and life cover) in unlisted shares or unlisted debt securities. This reflects the fact that most investments in start-up businesses result in a 100% loss of investment (between 50% and 70% of new businesses fail in the early years)
- For non-advised clients, firms must assess appropriateness before allowing them to invest through the platform. ( Can be included in platforms provided by Particeep)
- The restrictions the FCA has placed on the marketing of unregulated collective investment schemes, or UCIS, will apply to platforms that offer these investments
- In addition, while most platforms will simply be providing an introduction to an investment, they will need to think carefully about whether any supporting information they provide (such as a star rating or ‘investment of the week’ award) amounts to advice. If it does, the firm will need to apply to FCA for permission to advice on investments.
The above rules are thus to be taken into consideration when considering starting your own platform. As can be seen from the volume of the market, there have already been many people starting their own platforms in the UK in whichever type. But what are the developments of the market and who are the main players in this market?
UK Crowdfunding market development
The UK market is, as already mentioned, extremely developed compared to other European countries. Here some figures about the size and development of the market:
- A total amount of 3560€ million has been raised since the introduction of the concept
- An average growth rate of the whole market of 159% per year
- An average growth rate of 420% per year in equity-based crowdfunding
- An average growth of 253% in PtoP Business lending
- An average growth of 176% in reward-based crowdfunding
These figures show that there are massive developments going on in the UK alternative finance market. Let’s compare the UK market volumes with the volumes of the whole of Europe. The European alternative finance market had a total transaction volume of 2,957 million € in 2014 of which 2,337 million € from the UK market. It is impressive to see how big the UK market is compared to the markets in the other countries of Europe. The European market without the UK would have had a transaction volume of 620 million €. The reason for the UK being so developed is that it was the first country that introduced this financing method.
UK Crowdfunding market players
There are a few very big platforms with a lot of market share and many small platforms that have smaller market shares. We could identify the following platforms that represent the biggest part of the market;
- Crowdcube: represents a big part of the market as being the biggest platform in the UK Crowdcube is a platform on which you can invest on a debt, equity and investment base.
- Seedrs: one of bigger platforms in the UK. This platform enables investors to invest on an equity base in start-ups and in developing companies.
- FundingCircle: Is a loan-based platform wich allows savers to lend directly to medium and small businesses
- Syndicate Room: Is an equity-based crowdfunding platform, seen as one of the major players.
These are some of the platforms that dominate the biggest part of the UK market. As these platforms already occupy a large proportion of the market it can be difficult to compete against them. The opportunity in this still fast growing market is differentiation and good management.
Try to create a unique concept or way of presenting your platform to the public to attract people to your platform and manage your platform well by selecting interesting and good projects to attract serious investors to your platform.
Taking all the information we have so far; no extremely strict regulations, which makes the market easy to enter; huge market in terms of volume, by far #1 in Europe in alternative finance; and very promising development rates in the whole market, offer still many opportunities for new market entries.
For those interested in starting their own platform, keep in mind to differentiate yourself from the existing competitors and make sure you have a platform which includes all the requirements asked by the FCA.
If you; have any questions regarding this article; need more information; or if you are interested in starting your own platform, check our website or just get in contact with us and we will be more than happy to help you!
Ressources to launch:
- a basic crowdfunding platform, please follow the link
- a custom crowdfunding plateform based on our API, please follow the link