FCA has published its Dear CEO letter on its portfolio strategy for investment-based crowdfunders. It notes that if any firm that has received the letter is not currently active in the market it should apply to remove its permissions (or, as appropriate, cancel its authorisation).
FCA’s objective is to ensure crowdfunding firms promote investment opportunities appropriately so consumers can understand the risks of the speculative and high-risk investments on offer. It also wants to be sure firms can wind down in an orderly manner when necessary. FCA is concerned that too many consumers are still investing in inappropriate high-risk investments, and that they just “click through” the categorisation process, without understanding the risks of how they have been categorised. Further, it is concerned that many consumers are holding more than 10% of their investment portfolio in these instruments.
To mitigate these risks, FCA expects firms to do more to make sure customers understand the risks they are facing, both in terms of properly assessing the customer’s knowledge and experience at the outset, and then making clear to them what due diligence has been done on the underlying recipients of the funding. Firms must treat customers on both sides of an investment fairly.
FCA plans to monitor firms’ activities and warns the CEOs that it will be holding them and other SMF holders accountable for the firm’s actions.
The letter also sets out FCA’s expectations on firms in helping to minimise the risk that consumers will be victim to scams, and notes its concerns that firms may not be supervising their ARs adequately. FCA will be seeking assurances that firms have in place robust systems and controls to oversee their ARs.
Finally, FCA notes the risks that many investment-based crowdfunders will fail in a disorderly way and sets out what firms should be doing to ensure they understand the financial resources requirements and that they keep their wind-down plans up to date.