Recent regulations imposed on the crowdfunding industry threaten to unnecessarily impede an innovative and nascent industry, writes Comment Central. 
In the aftermath of the financial crisis, the then Shadow Chancellor, George Osborne, promised to scrap the existing tripartite system of financial regulation.

Branded "incoherent" and "without clear lines of accountability", he instead proclaimed an alternative architecture that would lead the "British economy from crisis to confidence".

Introduced only fifteen months ago, the new regime is based on three core pillars, each tasked with differing areas of regulatory responsibility. One of these pillars, the Financial Conduct Authority (FCA), is charged with protecting and enhancing confidence in the financial system.

In April this year, the FCA heaped a host of new restrictions on the crowdfunding sector.

Crowdfunding is an emerging online industry that, as the name suggests, allows small businesses and charities to raise money by taking small investments, loans or donations from a large number of people.

The new innovation has been hailed by industry experts and investors alike. Andy Haldane, Director of Financial Stability at the Bank of England has predicted that by directly connecting savers and entrepreneurs, banking middlemen become surplus to requirement (you can sense the mouths of banker bashers salivating at the prospect).

As well as imposing relatively modest capital requirements, the FCA's rules require new equity investors to be restricted to investing no more than 10 per cent of their net assets.

The restrictions on equity investors in particular have come in for heavy criticism. Stephen Hazzell-Smith, fund manager and founder of the Alternative Investment Market (AIM) has described the new rules as "nonsensical and unenforceable", pointing out that "people are allowed to bet money on the horses they want, so why not the companies?"

Write for us.

We're always on the lookout for talented writers and welcome submissions. Please send your opinion piece or pitch to:

Former Downing Street adviser and now Champion of TechCity, Rohan Silva, is similarly scathing.

The move by the FCA is in stark contrast to other jurisdictions. In the US, President Obama ? in a rare display of bi-partisan unity ? has teamed up with the Tea Party to endorse the industry. In France ? widely regarded as a market leader in crowdfunding ? the new Socialist Prime Minister, Manuel Valls, is an avid supporter. Even the European Commission, that great Belgian bastion of bureaucracy and red tape, is on board.

In April the Commission published a new policy paper extolling the virtues of crowdfunding. It described it as an effective way to finance small companies and stimulate growth. The paper was unashamedly titled: 'Unleashing the potential of crowdfunding in the European Union' and went on to warn member states against allowing their national regulators to stifle the new phenomenon.

So now we find ourselves in the profoundly ironic scenario of both the European Commission, and a French Socialist Prime Minister advocating a more free market approach than our own regulator. A situation where people can put more money on Burkina Faso to win the World Cup than they can on a new business start-up offering a realistic potential to deliver much needed jobs and growth to the British economy.

How have we arrived at this situation?

One credible explanation is that the rules and restrictions introduced by the FCA are due to it being a new body. All too aware that they have been formed from the ashes of a failed predecessor, the Authority's Executive Committee feel a compulsion to overregulate and project a sense that the new system is working and is anything but complacent.

Margareta Pagano, Editor-at-Large at the London Evening Standard has called on the Treasury to step in and overturn the FCA's rules. This is unrealistic. Such a move would fundamentally undermine the credibility of the new body.

Instead, the main players should focus their attention on alerting policy makers, politicians and journalists to the pitfalls further restrictions could cause their promising industry, whilst also highlighting the subsequent detrimental effects this will cause the still recovering UK economy.

1 vote

Sign-up for free to stay up to date with the latest political news, analysis and insight from the Comment Central team.

By entering your email address you are agreeing to Comment Central’s privacy policy