Financial watchdog urges caution on crowdfunding

Financial watchdog urges caution on crowdfunding

Recent findings resulting from a survey conducted by the Financial Conduct Authority (FCA) into crowdfunding companies indicate that the majority of platforms are misleading customers about the risks involved. The survey covered both loan-based and investment-based platforms.

The FCA observed that many crowdfunding companies were inclined towards being “unrealistically optimistic” regarding the opportunities on offer. Concerning investment-based crowd funding platforms; the FCA warned that the investment was unlikely to return a profit:
“It is very likely that you will lose all your money. Most investments are in shares or debt securities in start-up companies and will result in a 100% loss of capital as most start-up businesses fail.”

The Authority also noted “similar issues” with loan-based crowdfunding proposals.
The FCA went on to assert that with both loan and investment-based crowdfunding, it had heard of instances where negative comments regarding consumers’ experiences were suppressed by the company concerned.
Julia Groves, who chairs UK Crowdfunding, a body that represents several businesses in the nascent industry, said that the FCA findings were to be “welcomed”, though others in the industry have a different take. Barry James, founder of the Crowdfunding Centre, a research group, said the FCA’s blanket claim was “deeply worrying”. In any event, the results of the survey will likely be a blow to an industry which has seen significant growth over the past two years.

The launch last month of residential property crowdfunding platform Property Partner, boasting high profile investment and with personnel drawn from companies such as Google, indicates the extent of recognition of potential success for the crowdfunding model in residential property.
Crowdfunding offers possibilities to people with limited resources to participate in a property market play without having to commit a large amount of money, possibly beyond their capacity. This has seen a growing number of inexperienced retail investors investing in property without availing themselves of competent independent advice, with the prospects, and according to the FCA almost the inevitability, of losing their investment.
Viewed in that light, bona fide crowdfunding platforms, offering sound advice to their prospective investors, ought only to benefit from continuing FCA scrutiny.

By Cathal Leonard
Cathal is a land and property marketer with knowledge of both UK and emerging property markets. Cathal uses his vast experience to keep us updated on the real estate investment market.
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