The Financial Conduct Authority (FCA) has rolled out a consultation to implement stricter rules around the financial promotion of high-risk investments.
It is looking to address concerns about the ease and speed with which people can make high-risk investments by proposing a “significant strengthening of its rules on how high-risk financial products are marketed”, the UK regulator said on 19 January 2022.
This is part of the FCA’s Consumer Investments Strategy, published in September 2021, which aims to give consumers the confidence to invest and reduce the number of people who are investing in high-risk products that are not aligned to their needs.
Under the proposed rules, the FCA would ensure firms that approve and communicate financial marketing have relevant expertise and understanding of the investments being offered, improve risk warnings on ads and ban incentives to invest, for example new joiner or refer-a-friend bonuses.
Those looking to make certain high-risk investments would also be asked more robust questions about their knowledge and investment experience, after research found many consumers were investing without being aware of the risks.
The consultation comes shortly after the UK government confirmed its plans to bolster the rules on cryptoasset advertisements and protect consumers from “misleading claims”.
The FCA’s draft rules also include proposed restrictions on the marketing of cryptoassets, in preparation for the government bringing the promotion of these high-risk investments under the FCA’s remit.
When it does, the FCA plans to categorise qualifying cryptoassets as ‘restricted mass market investments’, meaning consumers would only be able to respond to cryptoasset financial promotions if they are classed as restricted, high net worth or sophisticated investors.
Firms issuing such promotions would have to adhere to FCA rules, such as the requirement to be clear, fair and not misleading.
The FCA is inviting feedback on its proposals by 23 March 2022. It will consider all feedback before determining its final rules and, subject to the responses received, intends to confirm its final draft in summer 2022.
Sarah Pritchard, executive director of markets at the FCA, said: “Too many people are being led to invest in products they don’t understand, and which are too risky for them. People need clear, fair information and proper risk warnings if they are to invest with confidence, which is the central aim of our consumer investment strategy.”
Can’t stop everyone
Nathan Long, senior analyst at Hargreaves Lansdown, said: “High risk investing has been booming of late with cryptoassets in particular proving to be the flavour of the month.
“There’s nothing necessarily wrong with high-risk investments, but those choosing them should ensure they understand the risks involved. Having sufficient time to invest, enough cash set aside for a rainy day and ensuring the high-risk investments are a sensibly sized part of their long-term portfolio are all important considerations.
“Cryptoassets are included because of the expectation that they will shortly fall under the FCA’s watch when it comes to their promotion. There are still anomalies, for example it looks to be easier to have a speculative punt on a cryptocurrency than it is to add small allocations to long term infrastructure investment in a pension.
“However, assuming these proposals come to fruition it looks likely to improve decision making and shift investing behaviour so that high risk investments largely remain small constituents of investor’s portfolios.”
Laura Suter, head of personal finance at AJ Bell, added: “There has been a boom in people investing during the pandemic, and in turn there has also been a steep rise in the number of newcomer investors putting their money in high-risk, inappropriate investments.
“The FCA wants to curb this trend and make it harder for novice investors to sleepwalk into buying high-risk investments. The regulator plans to tighten the rules on some investments, like mini-bonds, peer-to-peer and certain crowdfunding, so that investors can’t just buy them with a few clicks of the mouse.
“The regulator admits that it won’t be able to stop every low-risk or vulnerable customer from buying inappropriate investments. Instead, in the next three years, the FCA’s aim is to halve the number of people investing in high-risk assets who have a low risk tolerance or who are vulnerable.”
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