The move follows a series of corporate failures after raising investment through crowdfunding – including claims management company Rebus Group which went into administration in February this year after raising £816,790 on Crowdcube – and calls for the introduction of new investor protection measures.
A study of the industry, carried out by AltFi Data and law firm Nabarro at the end of last year, revealed that one in five companies that had raised money on equity crowdfunding platforms between 2011 and 2013 had collapsed since then, losing investors money.
Currently there is no protection for crowdfunding investors if the borrowers default on their loans: in the Rebus case, one investor alone lost £135,000.
In his letters, Andrew Tyrie has asked both the Prudential Regulation Authority and the Financial Conduct Authority to set out their approach to the risks and opportunities that crowdfunding and other forms of funding offer.
In particular, he wants FCA acting chief executive Tracey McDermott to explain where the responsibility lies for ensuring that accurate information is conveyed to potential investors through crowdfunding platforms, and whether there are sufficient incentives placed on the platforms to ensure that they accurately assess the creditworthiness of borrowers and firms seeking investment through them.
He also asks how aware consumers are of the level of risk associated with the investment opportunities offered through the platforms.
Finally, he asks McDermott to assess the impact crowdfunding has already had and is likely to have on competition in the financial sector .
In his letter to Andrew Bailey, deputy governor for prudential regulation, Tyrie wants to know about crowdfunding’s resilience to potential economic shocks and what the prudential impact of the financial sector’s increased exposure to unsecured loans has been and is likely to be in the future.
Globally, crowdfunding raised $34.4bn (£23.8bn) in 2015, including peer-to-peer lending ($25bn), reward and donation crowd-funding ($5.5bn) and equity crowd-funding ($2.5bn). The amount raised in Europe was $6.48bn.
According to NESTA, the UK alternative finance sector saw loans, investments and donations rise by 84% over 2015 to a total of £3.2bn.