The UK watchdog says it plans to modify some rules applying to the £3.4 billion UK market after uncovering worrying lapses in good business practice by loan-based and investment-based crowdfunding firms seeking full authorisation.

The FCA’s current rules came into force in April 2014. A post-implementation review of the market was kicked off in July this year.

The FCA says it found "unclear and complex" product offerings make it difficult for investors to run comparisons with alternative asset classes or assess the risks and returns of investing on a platform. It has also found that financial promotions run by firms do not always meet requirements to be ‘clear, fair and not misleading’. Furthermore, the arcane structure of some companies in the market introduces operational risks and conflicts of interest that are not being managed sufficiently.

In the loan-based market, the fissures run deeper, with the FCA expressing concern that "certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors."

The regulator says it has challenged some firms to improve their client money handling standards and to re-assess plans for wind-down to ensure the successful run-off of loan books to maturity.

The findings are likely to lead to a tightening of the rules governing crowdfunding and a far more prescriptive compliance regime.

Andrew Bailey, Chief Executive of the FCA, says: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers. Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”