The Financial Conduct Authority (FCA) has been criticized for its strict regulation of the crowdfunding industry, which critics claim stifles investment and cuts off vital funding flows for small and medium-sized enterprises (SMEs).
The UK Crowdfunding Association (UKCFA) has warned that these regulations could cost the economy billions of pounds in lost investment.
In a letter to Tulip Siddiq, the City Minister, the UKCFA said the FCA’s reforms were discouraging investors by making the regulatory framework too restrictive. The group, which represents more than 20 crowdfunding platforms, called for an independent review of small business finance to address the issue.
Bruce Davies, Chair of the UKCFA, highlighted the UK’s position as one of the most regulated markets for crowdfunding globally. He warned that this over-regulation deters investors and prompts some companies to seek financing in European jurisdictions that have less restrictive regulations.
The FCA’s reforms include measures such as risk warnings, bans on investment “incentives”, stricter suitability tests, and “frictions” designed to prevent rash investment decisions. However, these changes reportedly increased marketing costs, reduced the platforms’ ability to attract new investors, and made fundraising uneconomic for some platforms.
The association criticized the regulatory body for failing to achieve a balance between consumer protection and the need for a vibrant investment ecosystem. It also pointed to the rise in unauthorized and unregulated investment offers, which it claims pose a greater risk to investors.
The group estimates that over-regulation cuts off up to £16 billion of potential funding for SMEs, exacerbating financial barriers for small businesses at a time when access to capital is crucial.
A Treasury spokesperson defended the government’s commitment to striking a balance between investor access and consumer protection, while a spokeswoman for the Financial Supervision Authority said they were working to boost investor confidence and open discussions about risk.
Despite these assertions, the UKCFA insists that more proportionate regulation is essential to maintain the UK’s position as a world leader in capital markets while supporting sustainable economic growth through crowdfunding.