But people are sometimes harmed by their investment experiences through fraud and scams, failed advice businesses or from being persuaded to invest in high-risk investments that are not in their best interests.
Also, some ‘self-directed’ investors make choices that may not be suitable for their needs. The outcomes can be serious, causing significant loss and hardship to the consumer. It is a problem for all involved, including advisers, who pick up the tab through Financial Services Compensation Scheme levies for poor advice or when companies go under.
The consumer investments market accounts for £1.6tn held or invested by consumers through more than 6,000 wealth managers, advisers and platforms
The Financial Conduct Authority is looking to tackle this with the publication of its consumer investments: strategy and feedback statement.
According to the FCA, the consumer investments market accounts for £1.6tn held or invested by consumers through more than 6,000 wealth managers, advisers and platforms. So, the stakes are high.
And the problems are not going unnoticed. Duncan Glassey, founder of WealthFlow, says: “Investment harm remains a huge problem. We frequently see new clients with investments wholly unsuitable for them.
“Clients who in their day-to-day lives are fundamentally risk-averse are still being sold investment products and portfolios comprised of highly concentrated, poorly constructed, expensive equity funds, which is unacceptable.”
One of the main objectives of the FCA's strategy is to reduce the number of people falling prey to scammers or being arm-twisted into investing in products too risky for their requirements.
Another is to give consumers the confidence to invest, in an advice market that is both high-quality and affordable.
Sarah Pritchard, executive director of markets at the FCA, says: “We want to give consumers greater confidence to invest and to help them do so safely. We also want to be able to adapt more rapidly to the changing market and be assertive where we see poor conduct and consumer harm.”
The regulator has set itself ambitious targets to be achieved by 2025. It wants to slash by 20 per cent the number of people holding more than £10,000 investible assets in cash, which could be earning a return elsewhere. It reports that there are currently more than 8m people in this category.
Pandemic fallout is to be addressed too. The FCA noted that 6 per cent of consumers increased their holdings of higher-risk investments during the pandemic and that nearly half of self-directed investors (45 per cent) said they did not realise the risks. It therefore wants to halve the number of people investing in higher-risk products that are not aligned to their requirements. The regulator has already banned mass marketing of speculative mini-bonds.
Looking at the information consumers need, Sally Plant, head of financial planning at the Chartered Institute for Securities and Investment, comments: “The focus should include promotion of regulated advisory firms to consumers, not just banning sales and marketing of higher-risk products.”
She adds: “It would be interesting if self-directed investment platforms were to create an investment profile where at a certain point of risk or level of investment there was a call to action to receive full planning advice. That would demonstrate a significant willingness to prevent investment harm.”
Reducing investment fraud is also on the FCA’s priority list. According to the City watchdog, consumers lost nearly £570m to investment scams either undertaken or helped along by regulated companies in 2020-21. Another target is to "stabilise" the £833m compensation bill for the FSCS and aim for a year-on-year reduction in some funding classes, from 2025.
However, there is some adviser scepticism around this, as Carl Lamb, executive director at Smith and Pinching, says: “I will believe the reduction in levies when I actually see it. For the last number of years, it has just gone up.”
There is a list of tasks to be ticked off to achieve these goals. The FCA will be looking into regulatory changes that would make it easier for companies to provide more help to people who are looking to invest in mainstream products.
It also recognises that educating consumers will play a big part in the goal of helping them avoid investment harm. This will take the form of an £11m PR campaign to help people make better-informed decisions and stay away from risky investments.
Lamb agrees better understanding is a priority: “The key to all of this is client education on an ongoing basis. Unfortunately, there will always be scammers and rogues out there, so we all must work together for the greater good of the clients involved.”
The FCA acknowledges that it has more work to do in preventing scams, saying that it aims to become more "agile" in how it detects, disrupts and takes action against fraudsters.
In addition, it wants to strengthen the appointed representatives regime, with a consultation planned for later this year. While the regulator did not go into detail on this subject, it highlighted in its business plan that it wants principals and ARs that are competent, financially stable and who ensure fair outcomes for consumers.”
Michael Couzens, chief executive of network business Adviser Services, says: “It makes sense for the FCA to look at networks and other ARs and what they can do better. But with any changing regulations, you need to be clear about what you want people to achieve. The FCA doesn’t talk to firms like ours enough.”
The FCA’s plan also includes tightening up its financial promotions regime, including the classification of high-risk investments, further segmenting the high-risk market and strengthening the requirements on companies when they approve financial promotions. It will also review the compensation framework, particularly in cases where businesses go under, leaving liabilities for the FSCS to deal with.
Alongside the new strategy, the FCA published its consumer investments data review, highlighting actions taken between April 1 2020 and March 31 this year to tackle harm. It reports that 48 companies were prevented from gaining access to the market, where it had identified potential for consumer harm – a figure representing one in five applications.
It had also opened more than 1,700 cases involving scams or higher-risk investments and published more than 1,300 consumer alerts about unauthorised businesses and individuals.
While acknowledging that the new measures announced are a positive step, there is some doubt that all of the targets are achievable.
“Any additional help to identify and reduce scams has to be welcomed,” says Keith Churchouse, director at Chapters Financial.
“Some of the specified targets appear reasonable, such as reducing cash holdings by 20 per cent, while others, such as halving the number of investors in high-risk products, will be difficult to achieve, even by the end date of 2025.”
Churchouse is not convinced that the FCA has gone far enough: “The reason why consumers seek advice is because they want to place their trust in advisers, in part because understanding the opportunities within the advice arena can be daunting. I hope that the suggested regulatory changes will help this process, although the devil will be in the detail and delivery.
"However, £11m in a campaign to recognise high-risk investments is unlikely to go far.”
Glassey also says there is more to do, adding: “We should aim for the public to become as sceptical of DIY investment strategies as we are of shunning medical expertise and turning only to the internet for our medical advice.”
Fiona Nicolson is a freelance journalist