The Financial Conduct Authority (FCA) said that, following a review of the sector, it will consult on a further regulation for peer-to-peer lending.
It found it is difficult for investors to compare platforms with each other, to assess risks and returns and financial promotions do not always meet requirements to be “clear, fair and not misleading”.
The FCA is also concerned that there are inadequate provisions in the event a firm goes bust and cannot repay borrowings.
Loan-based crowdfunding is growing rapidly, with a report by innovation charity Nesta and the Cambridge Centre for Alternative Finance showing that consumer and business loans totalled almost £2.4 billion last year, up from £1.3bn in 2014.
Over the same period, the equity-based crowdfunding market expanded from £84 million to £332m, while debt securities grew from £4.4m to £6.2m.
A fresh consultation, to begin in the first quarter of next year, will look at strengthening rules on wind-down plans, additional requirements on cross-platform investment and extending mortgage-lending standards to loan-based platforms.
FCA chief executive Andrew Bailey said: “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.”