FCA slammed by crowdfunding industry for over-regulation

The UK economy has lost out on billions of pounds of investment over the past five years due to the City watchdog’s over-regulation of the crowdfunding industry, a leading lobby group has claimed.

In a letter to City minister Tulip Siddiq, the UK Crowdfunding Association called on the Financial Conduct Authority (FCA) for a new independent review of small business finance.

It follows what the group called the “unprecedented pace” of regulatory change since 2019, which they claim has hampered their ability to attract retail investors.

“The UK is now seen as having one of the most highly regulated markets for this type of investment in the world – overtaking even the US which has long been a laggard on supporting the benefits of crowdfunding,” Bruce Davis, chairman of the association, wrote.

“The impact of these changes has been felt in the increase in marketing costs for new issuance of investments, which in some cases have become uneconomic and left platforms reliant on the existing investors.”

Crowdfunding platforms allow investors to back private companies and often generate revenue by taking a percentage of funds raised or by charging investors.

The UK Crowdfunding Association, established in 2011, now represents over 20 platforms that provide equity and debt-based investments for small and medium-sized enterprises (SMEs).

While there has been some “cautious optimism” ahead of a “new phase of financial regulation,” the group said, there have been a number of barriers which have overly emphasised the risk of investing through the platforms.

The group claims this has deterred investors and companies from raising funds, many of whom are now “considering launching issuance in EU jurisdictions to avoid what were perceived as excessive costs, uncertainties and barriers to capital raising.”

The FCA has also failed to hit its Consumer Investments Strategy target set in 2021, which was meant to see a 20 per cent reduction in the number of consumers with a “higher risk tolerance” and over £10,000 in cash by 2025.

The main objective of the strategy was to increase the number of consumers with higher risk tolerances investing in direct products, such as stocks and shares.

However, the letter wrote: “There has been no progress made against this target over the past four years with the numbers of adults with significant cash holdings in fact increasing rather than decreasing.

“[The] UK is losing out on a significant source of sustainable economic growth – and one which could be remedied at little or no cost to the exchequer and providing economic benefits that would be felt across the whole of the UK.”

An FCA spokesperson said: “We’ve shown we’re up for a greater risk appetite, not least far-reaching listing reforms and forthcoming proposals on support for people so they’re more confident investing. We’d encourage people to take part in the open discussion on risk we’ve called for.

“Greater investment risk can benefit people through higher returns. But we also need to be clear that it comes to with greater risk from investments performing not as expected.”

The Treasury has been contacted by City AM for comment.