DBS

13 “While the crowdfunding industry is probably better known for its equity products, there is a rapidly growing and attractive sub-sector developing for debt based crowdfunded securities.” – Crowd for Angels CONDITIONS OF IFISA: The debenture is a transferable security issued by a company or a charity (although LLPs are not eligible); The investment is facilitated by a person carrying on an activity of the kind specified in Article 25 of the Regulated Activities Order 2001 through an electronic system operated by that person in an EEA State for such purpose; That person or another, acting under an arrangement with that person or at that person’s direction in respect of the investment, treats the account investor as its client and undertakes on behalf of the account investor to: (i) receive payments in respect of amounts under the investment; (ii) make payments, when due, in respect of the investment to the account investor; and (iii) exercise rights under or in respect of the investment. Consequently, self-promoted DBS cannot be held within an IFISA. Also, additional safeguards are available to IFISA eligible DBS holders: The DBS is always transferable and therefore there is an opportunity for liquidity during its lifetime. In the event of problems, the investors have one party that can act on their behalf to assist, as specified in the Terms and Conditions. So, this report focuses on crowdfunded DBS, held within an IFISA as we feel that they are a better fit for advisers looking for the safest bets for their clients; they are as regulated as shares or bonds bought via the retail market (although, as non-readily realisable securities), they are not standard assets and as fully transferable securities, they fall into the scope of MiFID. *Find the original list by going to: https://www.handbook.fca.org.uk/handbook/TC/App/4/?view=chapter INTERMEDIARY AUTHORISATION There are three key areas of consideration when looking at the regulatory authorisations required in this sector: FIRM LEVEL. Advising on these securities is subject to the firm having the permission to carry out the authorised activity of advising on investments as per Article 53(1) of the Regulated Activities Order. This is not the same as advising on P2P lending agreements (Article 53(2) RAO), which are neither securities nor retail investment products, meaning that no professional qualification is required to advise on them. ADVISER LEVEL. Those individual advisers advising retail investors on securities such as the ones this report focuses on must hold the appropriate qualification required by the regulator. They also need to be familiar with the regulatory restrictions which apply to non-readily realisable securities and also how MiFID applies. INDIVIDUAL QUALIFICATIONS. Y ou are qualified to advise on crowdfunded DBS if your qualification listed in the tables on the next two pages: 1) has activity 2 in the ‘Activity number(s)’ column; or 2) has an A in the ‘Key’ column. If activity 2 is listed but there is a B in the ‘Key’ column, it means that when RDR was introduced you needed to update your qualification. IFISA ELIGIBLE DEBT BASED SECURITIES VS. SELF-PROMOTED BONDS DEBT BASED SECURITIES • Always transferable • FCA authorised entities must be involved • That brings both FSCS and FOS protection into play • The regulated platforms will review and sign off the investment information • Regulated platforms must apply appropriateness criteria and categorise investors (whether the client is advised or not) • Eligible to be held within an IFISA • The regulated platforms must look out for investors’ interests • Regulated platforms must have oversight of receipt and distribution of interest payments • Likely not to be transferable or have restrictions on transfers • The non-FCA authorisation of the issuer/’arranger’ means no recourse to FOS or FSCS because the purchase was at investors’ own private risk • The information about the offer does not undergo any verification or due diligence by anyone external to the company (although a law firm will likely have been involved in a self- promoted bond) • Not IFISA eligible • No requirement for platform to keep ongoing relationship with investment for investor benefit • No requirement for platform to have ongoing oversight of receipt and distribution of interest payments SELF-PROMOTED BONDS