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Alternative Finance blog


Sacha Bright comments on 4th Alternative Finance Industry Report

1 month ago


Sacha Bright, founder and CEO of businessagent.com the regulated independent market place for the UK equity crowdfunding and business peer-to-peer (P2P) lending comments on Friday’s 4th Alternative Finance Industry Report by  the Cambridge Centre for Alternative Finance “Entrenching Innovation”.

“We are sure that the Financial Conduct Authority (FCA) will be reading Friday’s 4th Alternative Finance Industry Report by  the Cambridge Centre for Alternative Finance very closely and we hope that both the P2P and equity crowdfunding platforms are too. There’s a lot of really positive news in this report, the sector is growing, it is entrenching its position as a key part of the funding infrastructure for UK SMEs, start-ups and innovative businesses. However, there are some strong indications of areas where the sector needs to improve too.

 

“Friday’s report highlights that the majority of investors, 60%,  rely on the due diligence of the platforms, with the report stating that “platform-led-due-diligence is critical to investors”. We know that whilst the platforms strive to deliver the best service that they can for their investors the due diligence undertaken varies significantly between platforms. With such a high level of trust in the platforms will the FCA tighten the rules on this area and bringing more consistency to approaches? 41% of equity crowdfunding investors stated that the platforms were failing to meet their expectations on the verification of how companies would use the funds that they raise, which is pretty damning no matter what way you spin it. Working with independent regulated aggregators like businessagent.com, adhering to sector wide standards and collaborating with analysts like crowdrating.co.uk, who undertake more in-depth analysis into the companies pitching for investor funds would go a long way to addressing this issue.  As it stands today we offer crowdrating summaries for free on businessagent.com, but due to lack of platform cooperation there are currently more pitches without ratings than with.  

 

“Whilst awareness of the risks of equity crowdfunding and P2P lending relative to other asset classes are strong (see the graph on page 37 of the report), perhaps putting paid to many critics views that investors may underestimate the risks involved but certainly providing comfort to the regulator that the message of the risks in this asset class have hit home, the lack of time spent researching investment and low opinion of financial advice could concern the FCA. The report highlights that the majority of investors surveyed are spending 20 minutes to an hour a week selecting investments. This is considerably less than the 30 hours said to be the average time spent researching a holiday in the UK. And just 2% of investors strongly agree that seeking independent financial advice reduces or mitigates the risks associated with their online alternative finance activity.

 

“We believe that the report brings home the need for alternative finance platforms to provide more data in a consistent and comparable way. The easier it is for investors and businesses to research and compare the platforms the more comfort the regulator can take that investors have made an informed decision. With an increasing number of institutional investors using these platforms (25%-30% for many platforms according to friday’s report) it is more important than ever that platforms make it clear who is investing and if any special terms are involved, right now this information is not readily available and it should be. We noticed that the platforms ranked default rates and the number of business failures 7th out of 9 key risk concerns, but for investors this risk will rank much higher – it represents a loss of their whole capital investment after all.  By publishing defaults in a standardised and comparable way the true nature of this risk would be clearer to everyone involved and the robustness of the platforms due-diligence work could be evidenced.

 

“The 5 largest platforms represented 64% of total market volume in 2016.  The sector is maturing and consolidation is likely to continue; the development of a secondary market to provide additional liquidity for investors, regardless of the platform that facilitated their investment, will represent a key future development. Successful markets require a strong flow of reliable comparable data to operate and so the onus is on the platforms to provide this.  If you consider that the overwhelming majority of their ‘crowds’ are currently retail investors, the case for making information clearer becomes stronger still. But it is not just the retail investor who would benefit, increased transparency should also encourage further institutional investment and perhaps entice greater engagement from the professional advisor community, a community currently notable by their absence.  And if the platforms don’t take heed of the warning signs, particularly in relation to due diligence, perhaps in 2018 the regulator will step in to ensure that they do.”

 

For further information you can contact Karen Wagg on 077 255 58 551. Sacha Bright is available to discuss the report in more detail on 0797 071 20 22.

Tagged: Sacha Bright equity crowdfunding peer to peer lending P2P lending Alternative Finance Industry Report Cambridge Centre for Alternative Finance due diligence




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