Sunday, 11 December 2016

FCA Interim review is still looking through the wrong end of the lense


So now we have the FCA's interim report on alternative finance. Will it make any difference?

In the 21st century, you would have thought we might have learnt how to engage regulation with a new vibrant form of business finance. From the outcome of this turgid, starchy interim report from the FCA, its clear we have not.

For starters, if you look at the who the FCA are asking for input, it is mainly those parties with the most interest in minimal interference. So much so in fact, that this is one of the more inane comments that The FCA saw fit to include in the report -

Other matters 4.21
Five industry respondents said the FCA should not refer to blogs ((: and market commentators in the media, which may be sensationalised or subject to their own conflicts of interest. Instead, they recommended we focus on industry data.

Our response (FCA not us!)

We will continue to analyse due diligence standards in the ongoing post implementation review. As set out in Chapter 5, we are considering consulting on further rules on disclosure and may consider options for specific disclosures about the due diligence process, even if we do not go on to prescribe minimum due diligence standards.
To gain a rounded picture of the market, we will continue to consider all sources of data, including social media, consumer feedback and media commentary but will not give undue weight to any one source of information.

The key problem for the FCA is that they are looking to control the investors rather than the platforms. They try to limit the access to the platforms but under voluntary guides rather than rules - this will never work. People are too arrogant and or ignorant to admit they are not capable of knowing what to invest in. 

Control of the platforms in the form of making them more accountable, stopping them from using glossy advertising and restricting the use of third party FCA licences would be more appropriate here. This is business finance not some Saturday evening entertainment show.

Leave investors to fend for themselves - voluntary restrictions are doing that anyway. Get to grips with what the platforms offer investors and you will have a far better outcome. Crowdcube, the worst offender by far, is still producing the most ridiculous projections and valuations. Its advertising spend is massive and this is managing to hold the company up - despite the growing list of failures and lack of any real success. Their model needs to be banned - no due diligence, no post raise accountability, massive glossy misleading advertising, poor or non existent shareholder communications, poor or non existent S/EIS communications. But now we have Seedrs joining in with their Annual Portfolio Report, supposedly showing the majority of shareholders are doing well. It's a total fabrication.

The FCA needs to get together with HMRC and come up a new way of SME's filing accounts, listing their directorships etc etc. The current system is way behind the new business environment. Due diligence is made so much harder. As an example a recent pitch on Seedrs had a company looking for £1.5m as a loan. But the company was late filing accounts - so late it had had its first notice to be struck off. How does that happen? In fact this company had already moved its filing date, so it hadnt filed any accounts for 30 months. To add to the irony, the company declared it had applied for and was waiting for its FCA licence to allow it to carry out its main activity - raise money for businesses. Is someone taking the Michael?

The FCA seem powerless to do anything. They have kowtowed to big guns like Balderton, who have sunk large sums in to Crowdcube, and are now pussyfooting around the real issues.

Just by of example here is a little piece of the FCA report -

Due diligence standards on platforms 4.18 

Three respondents said that current due diligence standards are below those that would be expected for professional investors but most respondents said that standards are appropriate.

'Most' said DD was appropriate. In the time we have been running this blog and for the 4 years prior to that, we have not come across an investor who thinks the DD is appropriate - it stinks. It isnt just below a professional standard, it is criminally negligent. That's why we have companies going bust having never done a thing, why we have directors who are banned, why we have phoenixing like it was going out of fashion, why we have lies (promises) all over some pitches and why we have videos with fake entrepreneurs promoting the pitch. Platforms do not carry out anything but the briefest DD. It's all catalogued in this blog - the blog that respondents didnt want the FCA to read.

Our guess is that the final FCA report will just like the 2015 effort - a hands off whitewash which leaves 99% of all this just as before. 

6 comments:

  1. It is the due diligence that is the problem. Thick and uninformed people taking a punt I am afraid is human nature, to the extent that these poor souls do need protecting. If there were minimum standards of due diligence to be performed by the platforms, and consequently higher barriers to companies being able to list on them, perhaps the worst 20% of companies wouldn't be able to list.

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    1. Yes agree. It's clear now that many businesses are invented purely because they know that can try to raise their capital this way - it's far too easy. Due Diligence covers all things not just filings at CH - how robust are your sales figures, cash flow, what stress testing has been done, how will you go from £30k to £400k in 12 months etc etc.

      We are on it and will be announcing a new way for investors to get the information they need. The platforms will only change if the FCA force them to - unlikely I think.

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    2. "We are on it" best three words I've read so far in all of this blog.

      Turns out Crowdcube et al were not the champion of the ordinary investor afterall, you were.

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    3. Rob, the thick and uninformed aside, what you are proposing is only fair and correct.... like food labelling ffs. Give the man on the street a chance!

      I cannot believe you are fighting this battle solo- you deserve an army behind you!

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    4. Anyone thinking Crowdcube ever championed the ordinary investor lives in cuckoo land...

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    5. I actually think that the bigger point in all of this is that those with genuinely good business plans and have taken a robust DD position are being drowned out by the bad ones (and yes there are lots). It seems there is a must to make outrageous claims that are never going to come true on the basis that if you are realistic it looks very unexciting in comparison.

      I am also sick of being told that early stage investing is high risk and this is part of the territory. Bad DD and outrageous claims should not be confused with this.

      The sector COULD be better rather than just fall on its face which seems inevtitable

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