New FCA rules aim to give crowd-funding investors more protection and clearer information
Proposed new guidelines will give consumers investing through crowd-funding platforms greater protection and clearer information about the businesses they are lending money to, it has been announced.
Crowd-funding enables businesses, organisations and individuals to raise money, with investors pooling cash through a website, normally called a platform.
It can help entrepreneurs grow their businesses by investing in new technology or taking on more employees.
The proposed new rules, published by the Financial Conduct Authority (FCA), relate to equity investment-based and peer-to-peer crowd-funding.
The authority's director of policy, risk and research, Christopher Woolard, said: "Consumers need to be clear on what they're getting into and what the risks of crowd-funding 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 new plans require platforms to have plans in place to make sure loan repayments continue even if a crowd-funding supported firm collapses.
Investors will be told about the creditworthiness of borrowers, while those looking to lend money through peer-to-peer crowd-funding platforms will get clearer explanations of the loans' key features.
Both borrowers and lenders will be able to withdraw from agreements without penalty if either changes their mind during a 14-day cooling-off period.
Although investment-based crowd-funding is already regulated, the FCA is proposing that it too be subject to new rules.
It says such investments should only be promoted to consumers who understand any inherent risks and those who have the financial capacity to deal with any losses.
The FCA said it hopes its proposed new rules will make the crowd-funding market more accessible.
It said the proposals should give consumers more protection, help to boost competition in the sector and give small and start-up businesses easier access to alternative finance options.
Crowd-funding has been used to fund a wide variety of enterprises, including start-up businesses, civic projects, scientific research schemes, political campaigns, software development and film promotions.
Copyright Press Association 2013