Proptech regulators need to shift their focus – from products to companies

Regulations have been around for as long as people have been doing business. Businesses have been complaining about them ever since. Roman merchants sulked about overzealous Senators as much as Silicon Valley bosses do about those in Washington D.C. 

Today, though, the act of regulating is trickier. My industry, digital property investment platforms, is a good case in point. Technology is rapidly disrupting the sector. It has long needed a shake-up, so change is good, but it does mean regulators are having a hard time keeping up. 

Unfortunately, this is leading to mistakes. As an industry, we need to reassess our priorities: are consumers best protected by non-experts nit-picking, or by regulators shutting down rogue operators? I believe the latter. 

Why regulators are misdiagnosing industry horror stories 

Property investment platforms pool small amounts of investor cash before using it to back large-scale property development. Through this, many more investors get access to opportunities within real estate that were once the preserve of the super-wealthy and institutions due to the high investment threshold.

We’ve witnessed two firms with moderate public profiles go bust in the past twelve months: JVIP Group and Cogress. Investors lost millions, and there is understandable concern among investors, property developers, and regulators. The collapses were met with calls for closer regulatory oversight, and while the FCA didn’t make a public statement, the industry is rife with talk of new proposals. 

To date, the FCA’s response has been to suggest limiting access to these investment products to High Net Worth (HNW) investors – the suggestion being that regular investors don’t understand the risks. But this represents a misreading of what went wrong at the likes of JVIP Group and Cogress. In both cases, the investors were already HNW individuals. 

The FCA’s tinkering is based on a hunch that development projects are risky. A few rogue operators have collapsed, and the gut reaction is to point to the underlying investments. Yet the real problem lies with the investment platforms themselves. More specifically, the principals managing them. 

Whether borne of inexperience, hubris, or dishonesty, most mishaps in this industry come down to over-optimistic assessments during due diligence, ignorance of risk factors and lack of transparency with investors. 

All investments carry risk. These risks must be known and documented, and investors can make up their minds. HNW or SI investors cannot be expected to understand risks that are hidden from them any more than the average person. 

How to shift the agenda 

It’s vitally important that developers receive the funding necessary to see through housing or commercial projects. Small and mid-market developers are the backbone of the industry and deliver much-needed homes. It is only recently that funding has opened up for this sector, so unduly restricting the sale of these investments to investors will limit the growth of these firms and exacerbate the shortage of housing.  

The process of planning and development is already leaden with process and bureaucracy. Adding more complexity to financing will slow it down even further. Ironically, this could even lead to fewer project completions and more platforms going bust. The FCA should instead consider how we can open more funding to reputable development firms through a regulated platform where the platform carries out all the right checks and due diligence and presents it in a form easy to understand by investors.  

The FCA can’t be expected to understand the nuances of every investment structured by these platforms, but they can, and should, assess the internal management and governance framework of companies regularly. If the emerging industry of property investment platforms is to fulfil its potential, we need institutional-grade corporate governance with oversight of internal operations and risk management. 

A change of this nature would reflect how investors make decisions, too: when a consumer puts their savings in a Fidelity fund of listed companies, they don’t need to understand how the risk analysis of each portfolio company is carried out. They just need to be able to make a judgement on whether Fidelity is a trustworthy company that can be relied upon to do the proper due diligence. This is where our industry needs to aspire to be.  

The truth is, busting rogue operators will do far more to keep consumers safe than fussing over the intricacies of individual projects and who they are marketed to.

The FCA should also focus their attention on closing non-regulated firms operating in this space. Far more money is lost through unregulated firms than regulated ones, and yet it only takes 5 minutes scrolling social media to come across all sorts of investment opportunities being promoted by unregulated firms.  

Reinforcing the safety net for investors 

The value of good regulation was as evident thousands of years ago as it is today. The ancient Egyptians, Greeks, and Romans all had sophisticated systems of standardisation and measurement that kept the wheels of commerce turning and brought riches to empires.

Of course, there will always be complaints and calls to lower restrictions. Some of these will be valid. But this isn’t what we’re calling for here. We’re asking regulators to apply the same level of regulatory rigour, but to do so in a way that genuinely protects consumers. 

The Association of Real Estate Investment Platforms (AREIP) is a step in the right direction: the recently announced trade body seeks to standardise the industry, combat misinformation, and help investors evaluate risk. It’s also a demonstration that industry leaders are keen to collaborate with regulators. Together, we have the potential to change the property industry for the better.