Consumer Notice on Crowdfunding, including Peer-to-Peer Lending
Information Notice June 2014
The purpose of this notice is to alert consumers to the fact that crowdfunding, including peer-to-peer lending, is currently not a regulated activity in Ireland.
As a result, certain protections do not apply to consumers of crowdfunding, and consumers who engage in this activity should be aware of the following :
- The Central Bank of Ireland’s codes of conduct and the protections which they provide to consumers, do not apply to crowdfunding platforms;
- Crowdfunding platforms are not required to comply with client asset rules;
- Consumers of crowdfunding are not protected by the Deposit Guarantee Scheme or the Investor Compensation Company Limited (ICCL) scheme; and
- Complaints in relation to crowdfunding cannot be made to the Financial Services Ombudsman (FSO) as the FSO only deals with complaints in relation to a regulated firm.
While any investment, even through a regulated firm, carries with it an element of risk, there are specific risks to consider when any consumers consider participation in crowdfunding, including:
- The risk of the crowdfunding platform failing with a potential loss of some or all of their money;
- The risk of losing some or all of their money, should the business receiving the loan or investment fail, or the borrower default on loan repayments;
- The risk that the return on their investment is less than expected; and
- The risk of misleading or insufficient information disclosure, unfair contract terms or misleading commercial practices, and the absence of dispute resolution and redress mechanisms.
The Central Bank of Ireland is actively monitoring developments in this area and will continue to work closely with other European authorities in this regard. As this work progresses, the Central Bank may publish further information on this topic.
What is crowdfunding?
Crowdfunding can be described as a way in which money can be raised from a large number of individuals or organisations, to fund a business, project or personal loan, and other needs through an online web-based platform. It is a type of market-based finance that could help stimulate funding to small and medium-sized enterprises (SMEs) as well as personal lending. In addition, crowdfunding investments could potentially make up part of a diversified investment portfolio, especially for sophisticated investors.
How does crowdfunding work?
Crowdfunding can be structured in a number of ways. The most common models are:
- The Lending based Model where individuals lend money to a company, project or consumer in return for repayment of the loan and interest on their investment; this is also known as peer-to-peer lending. At this time, peer-to-peer lending is the only form of crowdfunding to have an established presence in Ireland.
- The Equity based model where individuals make investments in return for a share of the profits or revenue generated by the company/project.
- The Donations or Rewards based model where individuals provide money to a company or project for benevolent reasons or for a non-monetary reward.