In a Dear CEO letter, published yesterday (January 22), the City watchdog said that "far too often" the appropriateness of investment products was not properly considered and that this presented a “significant risk” of consumer harm.
This was particularly prevalent where high risk alternative investments were made available to less-sophisticated investors, the FCA said.
In the letter, the regulator urged investment firms to tackle this risk.
It said: “It is important that, where relevant, firms offering products and managing investments with exposure to alternative assets and strategies consider the appropriateness or suitability of those investments for their target investors.”
Such considerations included identifying the client type and investment need and recognising alternative products may only be appropriate for a niche market.
Firms should also comply with relevant restrictions on marketing to retail investors — such as the mini-bond ban — and adequately assess the appropriateness for retail investors.
The FCA added that firms which allow investors to ‘opt up’ to elective professional status were expected to “robustly assess” a client’s knowledge and experience of the relevant market through quantitative tests, urging them to refrain from recategorising a retail client if they did not meet the threshold.
The letter said: “We will review retail investor exposure to alternative investment products offered by alternatives firms.
“This will cover a broad spectrum of alternative investment products and strategies. In particular, we will be testing that firms are aware of who their customers are and that they are placing a clear focus on acting in the best interests of their clients and funds.
“We want to know if they have taken reasonable steps to ensure that investors adequately understand the risks they are exposed to through their investments and are not inappropriately exposed to products that carry risk beyond their risk profiles.”
The letter also warned on market abuse, market integrity and disruption, anti-money laundering and Brexit.
This is the third Dear CEO letter sent by the FCA this week. It outlined the areas of risk associated with the financial advice market in a letter to financial advisers as it readied itself for a crackdown on poor advice and unsuitable products.
Yesterday it turned its eyes on the asset management industry in general, warning on product governance rules and liquidity.
What do you think about the issues raised by this story? Email us on email@example.com to let us know.