As the FSA flexes its muscles once again, it is inadvertently showing how much muscle it lacks. In fact, the case can be made that thanks to such regulators we have our economic crisis.
The FSA reviewed 181 case files of advice firms and found that in 108 of them ‘the quality of disclosure was unacceptable’ (Citywire April 7th 2012). This is a frightening number. The complete report showed some even more concerning statistics, but the conclusion is simple: the regulator will not spot the problems early enough. It works past the event, when the damage is done and the poor person receiving the advice is left with the consequences.
Is there a better way then? Well one answer is to use Crowdfunding. I can already see the FSA fainting at the mere thought. After all, how are they going to regulate the Crowd?
Fact is, they are probably not and the US (they always seem to see the light before we do) is priming itself for this with the JOBS bill. This basically allows small investors to put money into small companies without the bureaucracy of the SEC interfering.
How does it work? Well, very simply, someone places an idea on a website and seeks to raise money. The Crowd – that is you and me – can choose to invest some money in it or not. This is the way Google, Facebook and all the others got started, except that due to the regulators we were not allowed in. The investment was made by professionals no doubt at a high cost to the entrepreneur, but doubtless they received good support in addition to the funding.
With Crowdfunding we will be able to invest in the next Facebook or Twitter or Microsoft. We do our own research (due diligence in the parlance of corporate finance) and if enough people like it, then the idea is funded.
The whole idea behind crowd funding is based on the collective knowledge of the crowd. If the something is not correct, then the forums surrounding the sites and the ideas will report it. Both the success and failure of the idea is based on its ability to gain traction on Twitter, Facebook, blogs and other social media outlets. It is fantastic.
Against the collective wisdom is the hard work of a group of bureaucrats like the FSA. I am sure they try very hard to find out what lies behind a company, an advisor, a product, etc and they do this by looking at the processes followed. Unfortunately these processes have proven incapable of stopping the biggest economic crises ever when a series of products were launched to fulfil the greed of a small group of people. In fact there was a report in the paper today about some relatively small trader working for JP Morgan gambling on Credit Default Swaps again – remember them? They brought the banks down in 2008.
There were many warnings about that the products being sold to us by banks were doomed well before the crisis reached its peak and the whole mountain of debt came tumbling down. However, many of us were sucked in by the convincing arguments of people qualified with various FSA approvals, so they must have been good?
To finance the growth of Enterprise Britain (and I do not mean this site, but I mean the 4.8 million small and medium size entrepreneurs in this country) crowd funding will be a real stimulus and the FSA has a real opportunity to show its wisdom – by leaving crowd funding the space to develop and grow. And the biggest benefit is, because we are talking about small investments a government bailout is not on the cards.
If you have questions about Crowdfunding, please email me on firstname.lastname@example.org.