Alternative funding platforms that have sprung up to help fill a gap in the market left by high street banks reining in lending could face tighter regulations under proposed amendments to the Financial Services Bill going through the British parliament's House of Lords.
The platforms, which include peer-to-peer lending websites such as Funding Circle and Zopa, allow people to provide funding directly to businesses or individuals either through loans or, in the case of Crowdcube, by investing in shares in a company.
The suggested amendments to the bill, which sets out the planned overhaul of Britain's regulatory framework and is expected to be passed by the end of the year, call for a new regime to authorise such platforms.
They also suggest that the new Financial Conduct Authority (FCA) should look beyond regulated financial services when considering competition in the market.
The FCA and the Prudential Regulation Authority are two new supervisory bodies being created to replace the Financial Services Authority (FSA), which is being scrapped as part of wider reform to shake up supervision of banks and markets.
"These alternative models have been slow to emerge partly because our regulatory authorities are only empowered to concern themselves with competition among regulated firms," said Simon Deane-Johns, a lawyer at Keystone Law and co-founder of Zopa.
Deane-Johns, who advised on the proposed amendments, pointed out that some alternative funding activities are unregulated while others are partially regulated. The lack of clear rules by which they must operate has created uncertainty, which is holding back the growth of the market, he said.
"It is unrealistic to assume that new business models will thrive without some alteration to the regulatory framework," he said. "Investors are confused about whether they are acting unlawfully when using some platforms."
With small firms struggling for funding as banks, facing higher capital requirements, cut back lending, the Conservative-led coalition government has been seeking to get much-needed cash flowing to boost investment and job creation.
In March a government commissioned task force looking to increase non-bank funding estimated a shortfall in financing for small companies of up to 59 billion pounds ($92 billion) over the next five years and recommended direct government support to aid the growth of alternative lenders.
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