Industry seeks clarity over forthcoming incentives ban
The UK Crowdfunding Association (UKCFA) is seeking clarification from the Financial Conduct Authority (FCA) over the scope of its forthcoming ban of incentives for high-risk investments.
The new rule is part of the regulator’s updated financial promotion rules and is set to come into force on 1 February.
In its August 2022 (CP22/2) policy document on the changes, the FCA outlined the ban as prohibiting any monetary and non‑monetary benefits that incentivise investment activity, such as ‘refer a friend’ or new joiner bonuses.
It does include a clarification which states: “We will exempt ‘shareholder benefits’. For example, discounted products or services produced or provided by the firm receiving the proceeds of the investment, from our ban on incentives to invest.”
However, this does not appear to have been sufficient to quell uncertainty, and the UKCFA is seeking clarity on behalf of its members.
Read more: UKCFA responds to FCA financial promotions proposals
“The UKCFA has raised a number of concerns directly with the FCA about the scope of the ban on financial incentives for high-risk investments and asked for clarification guidance to help platforms ensure they can carry out marketing promotions for investment offers without breaching the spirit and meaning of the rules,” a spokesperson for the UKCFA told Peer2Peer Finance News.
“We have received initial clarification (following questions raised during the FCA roundtables last year) but are awaiting further feedback on the scope of the rules.
“The UKCFA believe that this guidance is needed to ensure platforms are able to compete in the market on a more level playing field with other sectors whilst avoiding the harm which the ban seeks to address. We hope that the FCA can provide clear guidance on this issue in the very near future.”
The ban on offering potential investors, including high-net-worth (HNW) individuals, monetary or non-monetary incentives to invest has caused concern among some property platforms who rely on HNW investors to underwrite high-risk loans, in property development for example.
Although, the rules do not explicitly state that fees paid to such lenders would be classed as an incentive, or under what circumstances they might be.
Read more: Three times the FCA has unfairly labelled P2P lending as ‘high risk’
Companies are able to offer “real economy” products that they have produced. For example, a brewery company raising money through a crowdfunding platform could offer discounts on its own beer. However, that does not extend to financial products, so a P2P company issuing bonds could not offer free bonds.
“The FCA has also strengthened its requirements on appropriateness of investments and the certification of HNWs, who from 1 February, need to say why they believe they fall into that category of investor,” said Shearman and Stirling partner Thomas Donegan.
“The inappropriate opting-up of retail investors to HNW categories has been a particular problem on recent scandals, notably London Capital & Finance. This will present an additional hurdle for investors, which might make P2P lending less accessible for lower-income investors. Lenders (including P2P finance providers) will also have to follow new rules on establishing whether their products are appropriate for different kinds of investors.”
Legal Alternative principal David Blair said he was generally confident that there will not be any confusion that an origination fee isn’t an incentive for the purposes of the new rules.
However, he added: “This is one of many examples of commercial arrangement that could subjectively be interpreted to fall within the FCA Handbook definition of an incentive, if read in isolation. In the absence of the FCA honing the rules and guidance in COBS, the best protection firms have against over-zealous policing in the future is to do what the UKCFA has done and obtain confirmation from the FCA of its intended policy approach in respect of specific arrangements and retain a record of that confirmation.”
The FCA has been contacted for comment.
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