The Financial Conduct Authority is proposing to strengthen its promotions rules to protect consumers from high-risk investments, including cryptocurrencies, mini-bonds, peer-to-peer lending and certain crowdfunding.
Under the proposed rules, firms that approve and communicate financial marketing would have to demonstrate relevant expertise and understanding of the investments being offered, improve risk warnings on ads and ban investment incentives such as free money for new joiners or refer-a-friend bonuses.
In addition, people looking to make certain high-risk investments would be asked more robust questions about their knowledge and investment experience, the FCA said in a statement, with the risk warnings on adverts also likely to be strengthened.
It noted that the draft rules include proposed restrictions on the marketing of cryptoassets, the oversight of which is being brought under the FCA’s remit, as the government indicated yesterday.
The watchdog said it plans to categorise qualifying crypto-assets as ‘Restricted Mass Market Investments’, which means that only restricted, high net worth or sophisticated investors would only be able to respond to cryptoasset promotions.
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“Too many people are being led to invest in products they don’t understand and which are too risky for them,” said Sarah Pritchard, executive director of markets at the FCA.
“People need clear, fair information and proper risk warnings if they are to invest with confidence, which is the central aim of our consumer investments strategy.”
The FCA is inviting feedback on its proposals by 23 March 2022.
Nathan Long, a senior analyst at Hargreaves Lansdown, said: “There’s nothing necessarily wrong with high-risk investments, but those choosing them should ensure they understand the risks involved."
He said there are still anomalies in financial regulation, however.
“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.”
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The consultation harnesses behavioural insights to improve risk disclosure as well as drawing on FCA research that showed a wide education gap that exists with new investors, with almost half of self-directed investors not realising they can lose money by investing.
In particular, it found that younger people are more likely to buy high-risk investments, and are the group less likely to have money to fall back on if their investments did plummet in value, noted Laura Suter, head of personal finance at AJ Bell.
As she points out, the regulator admits that it won’t be able to stop every low-risk or vulnerable customer from buying inappropriate investments, but over the next three years aims to halve the number of people investing in high-risk assets who have a low risk tolerance or who are vulnerable.