FCA to strengthen rules for high-risk investments

Rozi Jones
29th April 2021
fca new screen
"We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses."

The FCA has published proposals to strengthen its financial promotion rules for high-risk investments to help retail investors make more effective decisions.

Recent research the FCA commissioned on self-directed investors identified a growing trend of retail investors choosing to invest in inappropriate high-risk investments that do not meet their savings goals and investment needs. The research found that 45% did not view ‘losing some money’ as a potential risk of investing.

The discussion paper seeks views on three areas where changes could be made to address harm to consumers from investing in inappropriate high-risk investments: the classification of high-risk investments, the segmentation of the high-risk investment market, and the responsibilities of firms which approve financial promotions.

The FCA’s classification of investments determines the level of marketing restrictions that applies to that investment. The FCA is seeking views on whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply, for example for equity shares and peer-to-peer agreements.

The FCA is also concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. It plans to strengthen its rules to further segment high-risk investments from other investments and is seeking views on how best to achieve this. The FCA is considering what improvements could be made to risk warnings, which are often perceived as white noise to many investors and often do not convey the genuine possibility of an investment loss. Other suggestions in the paper include requiring consumers to watch educational videos or to pass an online test to demonstrate sufficient knowledge about financial products.

Additionally, the regulator is seeking views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.

The FCA is inviting feedback on its discussion paper by 1st July 2021. It will consider the feedback received alongside further analysis and testing, and intends to consult on rule changes later this year.

Sheldon Mills, executive director of consumers and competition at the FCA, said: "We have been clear that we want to deliver a consumer investment market that works well for the millions of people who stand to benefit from it. We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses.

"We have already taken action by banning the mass-marketing of speculative mini-bonds. We continue to address harm in this market through our ongoing supervisory and enforcement action but recognise more needs to be done. Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don’t meet their needs."

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