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What has happened?

In August 2021, the FCA issued a Dear CEO letter to firms that it believes are active in the investment-based crowdfunding (IBCF) market.  If any firms are not active, the FCA expects them to apply to remove permissions that are no longer required or to apply to be deauthorised if no regulated activities are being undertaken.

The FCA’s objective is to ensure that crowdfunding firms promote investment opportunities appropriately so that consumers can understand the risks these speculative and high-risk investments pose. The FCA also wants to ensure that, in the event of failure, a firm can wind down in an orderly manner by having an effective wind down plan and holding adequate financial resources. It expects CEOs to ensure that there is clear accountability within their senior management team for addressing the issues set out in the letter and, where relevant, for sharing the contents with their Appointed Representatives.

What do you need to do?

The specific points raised by the FCA are as follows.

Inappropriate investments/conflicts of interest

• It is important that investors understand the risks they will be exposed to and the risks from their categorisation by the firm. Firms must ask them to provide information regarding their knowledge and experience and must categorise the investor and assess whether the investment opportunity offered is appropriate.
• The firm must make it clear to potential investors what analysis and due diligence has been undertaken on the underlying recipients of the funding so that they can determine how much extra work they might need to do before deciding whether to invest.
• Firms must take reasonable steps to reduce the risk that investors hold more than 10% of their portfolio in this type of investment, which is not likely to be in their best interests.
• Firms must be mindful of conflicts of interest between businesses raising money and consumers investing money, as well as potential conflicts between their own interests and those of clients.

Scams

• The FCA expects firms to understand the risks in their business model and to have in place appropriate safeguards to ensure that they act in accordance with investors’ best interests when they host and promote offers on their platforms. For example, firms must ensure they do not promote scams or inappropriate investments by conducting thorough due diligence procedures.
• It also expects firms to educate consumers about the risk of fraud and scams.
• To minimise the risk of loss from cyber-attacks or other events which result in data loss, firms should maintain a high standard of operational resilience, which includes having robust and effective data infrastructure and cyber controls.

Appointed Representatives oversight

• The FCA will be seeking assurances from the Chief Executives of firms with, or seeking to appoint, Appointed Representatives that they have robust systems and controls to oversee their activities.

Disorderly firm failure

• The FCA is concerned that, as IBCF firms are predominately loss-making, there is a risk that they may fail in a disorderly way, leading to consumer harm, including the loss of client assets.
• Firms should have a good understanding of their regulatory capital and reporting requirements including, where applicable, the potential liabilities and risks associated with Appointed Representatives.
• Firms should undertake regular reviews of the adequacy of their capital and liquidity to ensure that they always have enough capital and liquidity for their future needs.
• Firms should have a credible wind down plan that includes appropriate and timely triggers for implementation, together with a realistic timeframe and cost estimate for achieving the wind down.
• The FCA will undertake monitoring of firms’ capital and liquidity and will hold the CEO and the firm’s other Senior Management Function holders accountable for the firm’s actions if its expectations are not met.

How can we help you?

If you’d like to know more about how we can help you with your investment-based crowdfunding or Appointed Representative oversight arrangements, or with any other regulatory compliance issues, our expert team is here to help.

Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.