FCA blamed for 'billions' in lost investment as it's accused of killing off crowdfunding

The UK's economic growth has allegedly been stifled by billions of pounds due to over-regulation of the crowdfunding sector by the City watchdog, according to a major lobbying organisation.

The UK Crowdfunding Association voiced its concerns in a correspondence with City minister Tulip Siddiq, urging the Financial Conduct Authority (FCA) to initiate a new independent review on the financing of small businesses, as reported by City AM.

The plea comes after what the association describes as an "unprecedented pace" of regulatory evolution since 2019, which they believe has constrained their capacity to captivate retail investors' interest.

"The UK is now seen as having one of the most highly regulated markets for this type of investment in the world – overtaking even the US which has long been a laggard on supporting the benefits of crowdfunding," wrote Bruce Davis, chairman of the group. He went on to detail the repercussions of these regulatory changes, noting a rise in marketing expenses for new investments, leading to some becoming uneconomical and forcing platforms to depend on their existing investors.

Crowdfunding portals are instrumental for investors who wish to support private enterprises and typically earn income by taking a share of the funds raised or levying fees on investors. The UK Crowdfunding Association, founded in 2011, now includes more than 20 platforms which offer both equity and debt-based investments directed at assisting small and medium-sized enterprises (SMEs).

The group has expressed some "cautious optimism" about entering a "new phase of financial regulation," but highlighted several barriers that have put undue emphasis on the risks associated with investment platforms. These barriers, according to the group, have discouraged investors and companies from raising capital, with many now "considering launching issuance in EU jurisdictions to avoid what were perceived as excessive costs, uncertainties and barriers to capital raising."

The FCA has also missed its Consumer Investments Strategy goal set in 2021, which aimed for a 20% reduction by 2025 in the number of consumers with a "higher risk tolerance" holding over £10,000 in cash.

The primary aim was to encourage more consumers with higher risk tolerances to invest in direct products like stocks and shares. However, the letter stated: "There has been no progress made against this target over the past four years with the numbers of adults with significant cash holdings in fact increasing rather than decreasing."

It further argued that "[The] UK is losing out on a significant source of sustainable economic growth – and one which could be remedied at little or no cost to the exchequer and providing economic benefits that would be felt across the whole of the UK."

A spokesperson for the FCA stated: "We’ve shown we’re up for a greater risk appetite, not least far-reaching listing reforms and forthcoming proposals on support for people so they’re more confident investing. We’d encourage people to take part in the open discussion on risk we’ve called for."

They added, "Greater investment risk can benefit people through higher returns. But we also need to be clear that it comes with greater risk from investments performing not as expected."