UK Regulations: Urgent Action Required from Loan-based Crowdfunding Platforms

Morrison & Foerster LLP

The UK’s Financial Conduct Authority (“FCA”) published a “Dear CEO” letter on 28 February 2017 that requires urgent action from firms which operate a loan-based crowdfunding platform that facilitates loans to lending businesses. Failure to act may cause UK-based crowdfunding platforms and some of their borrowers to be in breach of certain regulatory requirements.

As set out in the FCA’s letter, lending businesses in the UK require permission to carry on the regulated activity of “accepting deposits” where they (i) borrow monies through a loan-based crowdfunding platform; and (ii) then lend the borrowed funds to others. If the lending business engages in such activities without such permission, this would involve a breach of the Financial Services and Markets Act 2000 (“FSMA”) and may be a criminal offence. Permission is not required if an applicable exclusion applies or if the borrower is not engaging in this activity “by way of business”.

Requirements for UK loan-based crowdfunding platforms by 14 March 2017

Relevant firms are required to provide certain information to the FCA by Tuesday, 14 March 2017. The information must include (i) an assessment as to whether the crowdfunding platform has been facilitating loans to lending businesses who have lent monies to others without the requisite “accepting deposits” permission; and (ii) the platform’s proposed actions to remedy and deal with existing breaches and prevent future breaches. Additionally, if the crowdfunding platform has been facilitating loans to lending businesses that do not have the required permission, the FCA requires the platform to immediately stop facilitating the acceptance of deposits by these borrowers.

The letter follows the FCA’s announcement in December 2016 relating to its proposals for implementing tougher rules that would be applicable to crowdfunding platforms. These represent part of the FCA’s initiative to identify and regulate so-called “shadow banking” activities, which itself forms part of the G-20 nations’ initiative, which is spearheaded by the Financial Stability Board.

From a practical point of view, this means that loan-based crowdfunding platforms will now need to undertake some degree of due diligence on the activities and regulatory permissions of their participants.

The full letter can be accessed here: https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-crowdfunding-lending-businesses.pdf

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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