Crowdfunding and the FCA

Sajid Javid Excerpts

Wednesday 18th December 2013 Westminster Hall

[The Financial Secretary to the Treasury (Sajid Javid)]

Welcome to the Chair, Mr Chope. I, too, congratulate the hon. Member for Huddersfield (Mr Sheerman) on securing this debate, and on the important work that he does as chair of the Westminster crowdfunding forum. I share his enthusiasm for crowdfunding and the peer-to-peer alternative funding platforms that he mentioned. I cannot think of a single thing he said that I disagree with; it is quite rare for me to say that to him. I say that not in a spirit of good will because it is close to Christmas, but because I thought he talked a lot of common sense. Clearly, he knows a lot about the issue, and I hope that he stays involved in it for a long time to come—it sounds like he will—because I think he can add great value to this area.

Small and medium-sized enterprises are a vital part of the UK economy and contribute significantly to economic growth, as we have just heard. In particular, access to finance is important to ensure that businesses reach their full potential. At times when there are greater constraints on credit, alternative finance markets, including crowdfunding, become even more crucial. That is why crowdfunding, though it may be a relatively new industry, is growing quickly.

[Meg Hillier]

May I draw the Minister’s attention to a donation-based crowdfunded organisation called Turning Earth in my constituency? It raised more than £13,000 through Crowdfunder and sells work spaces and classes in pottery. It says that, critically, the money levers in other money, because there is confidence in the community that the organisation will work. Does that not do something to tackle the asymmetry of banks, which are frankly letting down small businesses, and the challenge of funding small businesses?

[Sajid Javid]

The hon. Lady is right. There are examples of banks letting down small businesses. That shows the power of crowdfunding. I had not heard of Turning Earth before, but I am glad that she has brought it to my attention. I will take more interest in it now. If I heard her correctly, she mentioned that it has already raised £13 million—[Interruption.] Oh, £13,000. Well, that is an excellent start. There is great growth potential in that number.

Over the past two years, in total, more than £700 million has been lent through peer-to-peer platforms. There has been a 600% increase in equity platforms between 2012 and 2013, raising approximately £28 million this year. There has been significant growth in debt-based security platforms of more than 370% in a year, raising almost £26 million over the past three years.

The crowdfunding market has huge potential to expand much further, and the UK has a strong global position in crowdfunding investment. Like the hon. Member for Huddersfield, I am keen to ensure that we maintain and grow that position. As such, the Government have taken a number of steps to support this burgeoning industry. We have invested £30 million in peer-to-peer platforms through the business finance partnership: £20 million has been provided to Funding Circle, which facilitates loans to small businesses, and £10 million has been provided to Zopa, which has facilitated £432 million of lending since its launch in 2005.

Our generous tax reliefs, granted through the seed enterprise investment scheme, are widely used by equity platforms. Some platforms have reported that 80% of investors are using that scheme, which provides an important incentive for investors to invest in smaller, perhaps riskier businesses, allowing them to grow.

[Meg Hillier]

One of the FCA’s considerations is separating the sector into debt crowdfunding and equity crowdfunding. I represent Seedrs, which is based in Shoreditch and does a great deal of good work in this area. The sector is very diverse, so will the Minister comment on whether the Government desire to keep that diversity while ensuring that there is regulation, without making false divides and pigeonholing the diverse crowdfunding industry into the categories of debt, equity or, indeed, donations? Donations are not within the FCA’s remit at the moment.

--- Later in debate ---

[Sajid Javid]

I thank the hon. Lady for her intervention. I am just about to address regulation; that might help to answer her question. This is also a good opportunity to pay credit to Shoreditch as an area that is heavily involved in crowdfunding. It is a growing space, and I would like to see it continue to grow.

We listened to the peer-to-peer side of the industry when it asked about regulation. We are working with the FCA to regulate that side of the industry and develop a proportionate framework. The framework has been well received by the peer-to-peer industry. Although the equity and debt security side of the crowdfunding market is already captured by some regulation, it is keen for a more tailored framework. The platforms’ view is that regulation provides them with credibility and helps to attract investors. They actively lobbied the FCA for inclusion in the consultation, and we supported them to achieve that goal.

Although we recognise the importance of regulation for the industry at the request of the platforms, it is essential that regulation be proportionate, as all hon. Members have said, if we are to ensure that it does not stifle the market’s growth. The Government therefore continue to work with the platforms and the FCA to ensure that the optimum framework is implemented—a framework that satisfies the industry, provides increased certainty to investors, and enables the crowdfunding industry to continue on its upward trajectory.

Before I close, I would like to say that having proportionate regulation is also key to ensuring that there are no unnecessary barriers to entering the industry. One of the industry’s successes over the past few years has been the very light barriers to entry. The Government and the regulator are keen to ensure that we have regulation that is proportionate enough to achieve the objective of protecting consumers, both borrowers and lenders, without creating barriers to entry that make the industry grow at a slower pace or stifle growth.

[Meg Hillier]

I welcome the Minister’s comments, because some years ago I called for regulation, but not to such an extent that it might put people off. Perhaps he can write to us if he does not have this information. NANA in my constituency is a café run by older women that was funded through donations on Kickstarter. Nana is located in former toilets on Chatsworth road in Homerton, and people fund it by buying a tea towel or donating a cheque. At the moment, the FCA is not considering the regulation of that sector. Does the Minister have any information on whether regulation of the donation sector will at any point be considered by the FCA or the Government?

[Sajid Javid]

As the hon. Lady kindly suggests, I will write to her and take a closer look at what plans the FCA does or does not have.

[Mr Sheerman]

Will the Minister do some missionary work with his colleagues? This is a cross-departmental issue, and one does worry. The Secretary of State for Business, Innovation and Skills is well apprised of the issue, and we have met him. We want a better relationship with the Treasury team, because people are having to think about this business of investing only 10% of their portfolio. Most people who invest, or who will potentially invest, in crowdfunding would have no idea what a portfolio was if it jumped up and bit them. Every time I complain about “sophisticated” investors, the FCA and other people say, “Well, it’s part of the literature.” It is demeaning to say that people can do something only if they have a certain net worth and if they are a “sophisticated” investor. I do not mind “experienced” or another term, but “sophisticated” upsets many people in crowdfunding.

[Sajid Javid]

I share the hon. Gentleman’s concerns, and if there are too many barriers to investment, it could stifle growth. I have relayed my concerns to the FCA. As we have heard, one of the consultations has just closed, and the other is about to close. I believe that we will get a report from the FCA by February. He makes an important point.

[Mr Sheerman]

Last week, here in Parliament, we hosted the founder of Indiegogo, which is a pioneer. Is it not interesting that bright, talented women are coming into crowdfunding because there are fewer barriers? Many sites are run by people such as Karen Darby. The sites are successfully changing the world, but they are also giving women an opportunity to use their talent, when, in some areas, they do not yet have that opportunity.

[Sajid Javid]

The hon. Gentleman again points out one of the successes of this growing industry. We heard from my hon. Friend the Member for Cambridge (Dr Huppert) that more young people are involved in the industry and, in some cases, are perhaps finding it an easier platform than banks for raising money.

I congratulate the hon. Member for Huddersfield again on securing this debate. I reassure him and all other hon. Members that we would like to encourage the growth of this industry.