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Following feedback to its Call for Input (CFI) on Consumer Investments, the FCA has published proposals to strengthen its financial promotion rules for high-risk investments to help retail investors make more effective decisions.

The discussion paper (DP) seeks views on 3 areas where changes could be made to address harm to consumers from investing in inappropriate high-risk investments. The 3 areas of focus are the classification of high-risk investments, the segmentation of the high-risk investment market and the responsibilities of firms which approve financial promotions.

The feedback to this DP will help shape the rules the FCA plans to consult on later in the year, ensure they are feasible for firms to implement and that they have the intended impact.

Sheldon Mills, Executive Director, 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.'

Preventing harm in the consumer investment market is a priority for the FCA. Recent research it 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. This can lead to significant and unexpected investment losses. The research found that over 4 in 10 (45%) did not view ‘losing some money’ as a potential risk of investing.

The discussion paper focuses on 3 main areas where the FCA intends to strengthen its financial promotion rules to help investors make more effective decisions that meet their savings and investment needs:

• The classification of high-risk investments: 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.
• Further segmenting the high-risk investments market: The FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. Therefore, the FCA 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. This could help prevent consumers from simply clicking through and accessing high-risk investments that they do not understand.
• The approval of financial promotions: Firms which approve financial promotions for unauthorised persons play a key role in ensuring those promotions meet the standards we expect. The FCA 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 1 July 2021. It will consider the feedback received alongside further analysis and testing, and intends to consult on rule changes later this year. The feedback received is important to help it understand what is feasible for firms to implement, how to strike the right balance between protecting consumers and consumers taking responsibility for their own actions, and identifying any unintended consequences of these changes.

The FCA will publish a full response to its CFI on consumer investments, alongside the next steps on its wider consumer investments strategy, later in the year.

Notes to Editors

1. For the purpose of this paper, the FCA considers any products subject to a marketing restriction under its rules to be a ‘high-risk investment’
2. Discussion Paper 21/1: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions
3. Call for Input: Consumer Investments
4. The FCA has already taken action to improve the market by permanently banning the mass-marketing of speculative illiquid assets (including speculative mini-bonds) to retail investors. The FCA recently launched a digital disruption campaign to prevent investment harm. The campaign uses online advertising to disrupt investors’ journeys and drive them to the high return investments webpage – which covers key questions consumers should ask before investing. The FCA is also designing a new campaign to address the harm caused from consumers investing in high-risk, high-return, illiquid investments that may not be suitable for their needs.
5. The FCA carries out extensive work to ensure compliance with its rules, including checks at the gateway, ongoing supervision and enforcement action. For more information on this activity see its consumer investments data review
6. FCA research findings into better understanding investors who engage in high-risk investments