The Financial Conduct Authority (FCA) has come under fire for its strict regulation of the crowdfunding sector, which critics say is stifling investment and cutting off vital funding streams for small and medium-sized enterprises (SMEs).
The UK Crowdfunding Association (UKCFA) has warned that these regulations could cost the economy billions of pounds in lost investment.
In a letter to Tulip Siddiq, the city’s minister, the UKCFA argued that the FCA’s reforms discourage investors because they make the regulatory framework too restrictive. The group, which represents more than 20 crowdfunding platforms, called for an independent review of small business financing to tackle the problem.
Bruce Davis, chairman of the UKCFA, highlighted Britain’s position as one of the most regulated markets for crowdfunding worldwide. He warned that this overregulation is deterring investors and pushing some companies to seek financing in European jurisdictions with less restrictive regimes.
The FCA reforms include measures such as risk warnings, a ban on “inducements” to invest, stricter suitability tests and “frictions” designed to prevent impulsive investment decisions. However, these changes have reportedly increased marketing costs, reduced platforms’ ability to attract new investors and made fundraising uneconomical for some platforms.
The association criticized the regulator for failing to balance consumer protection with the need for a vibrant investment ecosystem. It also pointed to an increase in unauthorized and unregulated investment offerings, which it said pose a greater risk to investors.
The group estimates that over-regulation is cutting off up to £16 billion of potential funding for SMEs, exacerbating financial barriers for smaller businesses at a time when access to capital is crucial.
A Treasury spokesperson defended the government’s commitment to balancing investor access with consumer protection, while a spokeswoman for the FCA stated that they are working to promote investor confidence and reduce discussions about risk-taking open.
Despite these assurances, the UKCFA emphasizes that more proportionate regulation is essential to maintain Britain’s status as a global leader in capital markets while supporting sustainable economic growth through crowdfunding.