The Financial Conduct Authority (FCA) is expected to introduce new rules for high risk investments after research shows that nearly half of private investors do not view loss of money as an investment risk.
In a discussion paper released today, the City Watchdog made proposals to strengthen the rules governing funding that too many people are still investing in inappropriate investments.
Suggestions include requiring individuals to watch educational videos or pass online tests to demonstrate knowledge of financial products.
According to the report, the FCA will now focus on three areas including classifying the high risk assets market and approving financial actions.
The regulator will try to expand the types of investments that are subject to marketing restrictions. It will also try to improve the risk warnings, which it said currently do not “convey the real possibility of a loss of investment.”
This can include visual warnings and changing the location in which they are displayed.
Sheldon Mills (pictured), FCA Executive Director for Consumers and Competition, said: “We are concerned that consumers are too often investing in high risk assets that they do not understand and that can result in significant and unexpected losses.
“We have already taken action by banning the mass marketing of speculative mini-bonds. We continue to counter the damage in this market through our ongoing monitoring and enforcement efforts, but we recognize that more needs to be done. ”
This is because the FCA has been heavily criticized by London Capital & Finance for handling the mini-bond scandal. Two reviews were released late last year that give a damned assessment of the regulator’s competence.
Based on the FCA’s Financial Lives Survey, 6% of retail investors increased their holdings of high-risk assets during the coronavirus pandemic, despite a widespread increase in consumer vulnerability.
Research by BritainThinks has also shown DIY investors fail to understand basic pitfalls. 45% said they did not see losing money as a potential investment risk. At the same time, 59% said that a significant loss of investment would have a “fundamental impact” on their lifestyle.
“Good quality funding is not enough to protect consumers from inappropriate investment,” the paper says.
“Funding may meet our requirements, for example fair, clear and not misleading, but the underlying product may still be unsuitable for most retail investors and not meet their needs.”
Simon Morris, financial services partner at law firm CMS, said, “This discussion paper operates within a complex and restrictive legal framework and has been criticized for the abuse of LCF advertising rule violations. It offers only a minor solution to a much broader problem.
“The FCA is proposing rule changes – more risk warnings, marketing bans and possibly online testing before you can invest in high risk products. However, this will only make a limited difference unless a great many more things happen.
“These mostly require legislation, and it’s a shame the FCA hasn’t made this clearer.”
Feedback on the discussion paper is open until July 1st. The FCA will discuss rule changes later this year.
FCA to contain risky investment products