David Blair, Osborne Clarke

The role of regulation in real estate crowdfunding

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As crowdfunding becomes more mainstream there is greater scrutiny from regulators. A Piece of London asks David Blair, the head of financial regulation at International law firm Osborne Clarke on what investors need to know about regulation and its impact on property crowdfunding

How has crowdfunding changed the landscape for investing?

Typically, retail investment has been orchestrated through advisers and managers and there’s a lot of complexity around regulation of those managers and advisers to de-risk the investments that they permit their investors to go into. Because of the complexity of the regulatory regimes that the managers and advisers have to comply with, it increases cost to the investor of engaging those professional firms.

What crowdfunding does is allow direct participation on what’s known as an execution-only basis, and that reduces the cost, because obviously, if you try to de-risk an investment, but you pay more to do so, the extra costs that you’re paying to de-risk have to be factored into the equation, and what crowdfunding has sought to do is to allow people to make their own bet, backing their own judgment, and therefore de-risking in the basis of lower cost.

Is regulatory compliance important & what are the specific regulations for equity crowdfunding platforms?

It is very important, regulatory compliance. It’s not subject to the same degrees of complexity of regulation as the more traditional retail investment channels, but there is still a proportionate regulatory regime. It allows a reduction in cost but there is still something that are for investor protection. There are three main ways in which the regulations achieved. One is the promotion of the investment. Making sure that the investments are presented in a clear and transparent manner to investors. Second is making sure the investors understand what they’re going to invest in, and finally restricting the categories of investor that can invest and broadly there are three categories. One is high net worth individuals, another is sophisticated investors, and the third is investors who say that they won’t invest more than 10% of their net assets in crowdfunded investments. It’s also possible for investors to come in on an advised basis but that is not traditional crowdfunding.

What role do the FCA play?

The FCA writes the whole book on regulation and enforces it. It supervises regulated firms. It visits them. And there’s a complaints mechanism for investors through the financial ombudsman service, and the rules that apply are as described previously. They focus on investors coming in and understanding, and also on accounting and reporting and keeping a good record.

A Piece of London is an Appointed Representative of an authorised firm. What does that mean?

The authorised firm in A Piece of London’s case is Sapia Partners, it’s directly authorized for financial conduct authority and signs up to those rules and is subject to inspection by the FCA. What it does in appointing A Piece of London is effectively undertake to the FCA that it will guarantee A Piece of London’s compliance with those FCA rules as if it were directly authorized.

How does crowdfunding affect an individuals ability to invest in property?

The main feature of crowdfunding is it allows smaller investment as compared to a direct investment in property, so that, in turn, enables investors to diversify their investment. It also enables investors who wouldn’t otherwise be able to afford to invest in property to have some stake in the real estate market. The diversification allows a de-risking to a certain extent, so if you have invested in one property and there are unperceived problems that require major work or if it’s difficult to get tenants in, all your eggs are in one basket, and you have to take that risk on a one-off basis. If you invested in several properties, you can diversify that risk. What it doesn’t permit you to do is avoid general market risks like the property market losing value across the board.

How do you see regulation changing for property crowdfunding in the future?

The regulation for equity crowdfunding is based on old legislation which has been in place for many years and that is subject to evolution but I don’t think it’s going to affect crowdfunding in particular. In fact it will have minimal impact on crowdfunding. There are specific rules in place for crowdfunders that have been developed recently and there’s going to be a bedding period for those, I don’t think there’s going to be a lot of change in the near future, and that’s largely because crowdfunding is very much aligned with government policy in a number of areas. Allowing investors greater investment choice and also recently the Prime Minister has announced the intention to crack down on the proceeds of crime being invested in UK property, that’s becoming a concern, and the good thing about crowdfunding is there’s a built-in anti-money laundering process involved, so that weeds out the proceeds of crime inherently, so crowdfunding is in line with government policy.

 

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