DBS

53 protection and opportunity. I don’t think they’re overly restrictive: if people don’t get all the answers to the Appropriateness Test right, I don’t want them on the platform. I don’t want them to invest with us if they don’t understand they could lose their money. If they don’t understand they can’t necessarily change their mind and sell their bond when it suits them, then they shouldn’t be investing. I was glad that in the end the FCA decided only to allow fully regulated platforms to manage IFISAs and to exclude mini bonds issued by a single company privately, and not through a regulated platform. Companies offering their own bonds to their corporate finance contacts benefit from a number of exemptions from the rules that we, as an FCA regulated platform, need to follow. It usually means that no regulated entity is arranging the deal, which leaves not only the investors but also their advisers exposed. Crowd bond platforms like Downing Crowd are required to categorise their investors, assess appropriateness, sign off bond offers under Section 21 of FSMA, keep client money separate, offer cooling off periods and, perhaps most importantly, they are there to act as an agent for bondholders post investment. And with investment based crowdfunding, under the FSCS investment protection scheme there may be circumstances in which investors can claim up to £50,000 of compensation where Downing LLP (or any other appropriately authorised platform) is unable or unlikely to honour legally enforceable obligations against it (e.g. claims for fraud). Investors will not be able to claim under the FSCS deposit scheme simply because a Bond fails to repay capital or pay interest, but it is another differentiator from loan based crowdfunding where FSCS Investment protection does not apply. I’d like to see greater clarity on the expectations in terms of disclosure. Currently there is no industry standard for disclosure and depends on the platform. We’re also looking for a mechanism for considering whether debt securities that are traded on crowdfunding platforms are, should be treated as standard or non-standard assets: There is no way of actually achieving that from a regulation point of view, because there’s no category of corporate bonds any more on the standard asset list, which we don’t think is sensible. That means there’s no opportunity, even if you had very liquid assets for a debt based security to be classified as a standard asset unlike AIM shares, for example, which potentially have the same liquidity. We want to see the regulator make an effort to come up with a better framework that encourages people to generate liquidity. Beyond that, we would like to see the regulator be a lot clearer about the definition and responsibilities on mini bonds, particularly the involvement of authorised firms signing off financial promotions for mini bond issuers. It is not clear where the liabilities lie in that signing off process and there has been some evidence of mini bond financial promotions being signed off by authorised firms which don’t have the necessary permissions to distribute that investment to retail investors. This means there is a greater chance that the inherent risks in the product are not made clear to investors who just accept the sign off as some kind of official approval. The regulator does seem to be moving towards swifter enforcement of those rules but it still takes an awful long time for the FCA to move into action and swifter, more judicious use of enforcement rules would definitely be beneficial. WHAT DO YOU THINK IS THE OUTLOOK FOR DEBT BASED SECURITIES? DO YOU SEE ANY CLOUDS ON THE HORIZON AND ARE THERE ANY CHANGES YOU WOULD LIKE TO SEE IN THE DBS MARKET IN THE FUTURE? As Bruce has touched on, I’d really like to see the SIPP regulations loosened because what’s happening is you have these fantastic pensionable assets, some with five, ten, fifteen year terms and for someone in retirement, getting an income, benefitting from a pension tax wrapper, over that period of time is absolutely superb. There’s a temptation for platforms and promoters to label private company loans as “bonds” and offer “first- loss provision funds”, all of which position it in the wrong way. These securities are not liquid and there is a risk to capital. Investors know this and are prepared to take the risk to get a sensible return. I feel the ISA route is another step down this road – the wrong road in my view. But the outlook is very positive. The sector is becoming more established, with well-known firms stepping into the market, bringing investment know- how rather than the internet tech focus of early players. Interest rates on deposits and other traditional assets remain low and I don’t see that changing soon. Banks are still oppressed by mistakes of the past, so they can’t meet the demand for funding. I think we will see continued rapid growth. As Matt says, there are a number of of established investment managers and fund managers moving into the direct space, partly driven by the EIS and VCT changes, and I think that is a good thing for the industry as the 80+ Financial Advisers who are using our portal tell us they are more comfortable adopting new products such as Crowd bonds from firms they have worked with for some time. BRUCE DAVIS JULIA GROVES JAKE WOMBWELL-POVEY ROHIN MODASIA MATT TAYLOR JAMES CRANMER LISA BEST