In a consultation paper this morning (January 19), the regulator said it was preparing for “a significant strengthening of its rules” on how high-risk financial products are marketed to prevent consumers from accessing investments they do not understand.
This follows a discussion paper in April, where it first floated ideas around forcing people to take an online test before they can invest in high risk assets, as part of its consumer investments strategy.
Under the proposed rules, the FCA will ensure firms that approve and communicate financial marketing have relevant expertise and understanding of the investments being offered, improve risk warnings on ads and ban incentives to invest, for example new joiner or refer-a-friend bonuses.
Alongside tests and risk warnings the FCA has proposed requiring consumers to watch educational videos before they can invest, introduce deposit collection, and investment frictions such as cooling off periods or requiring text message confirmations before investments are made.
Sarah Pritchard, executive director of markets at the FCA, said: “Too many people are being led to invest in products they don’t understand and which are too risky for them.
“People need clear, fair information and proper risk warnings if they are to invest with confidence, which is the central aim of our consumer investment strategy.”
The FCA also proposed restrictions on the marketing of cryptoassets, in preparation for the government bringing the promotion of these high-risk investments under its remit.
Once this happens, the FCA said it plans to categorise qualifying cryptoassets as ‘Restricted Mass Market Investments’, meaning consumers would only be able to respond to cryptoasset financial promotions if they are classed as restricted, high net worth or sophisticated investors.
Firms issuing such promotions would have to adhere to FCA rules, such as the requirement to be clear, fair and not misleading.
The FCA said it is proposing to require that all financial promotions for ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments’ contain a risk warning which says: "Don’t invest unless you’re prepared to lose all your money invested. This is a high‑risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2min to learn more."
As part of the proposed changes, the FCA also wants to strengthen the role of a 'section 21 approvers', who approve financial promotions for unauthorised people and check for compliance with the FCA’s rules.
The regulator is looking to clarify the responsibilities of this position.
The regulator expects that the proposals will result in direct costs to authorised firms, unregulated issuers of high risk investments and firms promoting cryptoasset investments. It has estimated total one‑off costs to amount to £59m plus ongoing costs from reduced investment activity.
It said: "Whilst our analysis gives an indication of the benefits of our proposals, we cannot reasonably predict how many consumers will stop investing in high‑risk investments where this would be inappropriate for them, nor estimate the amount by which they will reduce their investment as a result of our proposals.
“We have, however, produced a break‑even analysis to provide an indication of the overall scale of the anticipated benefits that would be necessary to offset the costs of the policies.
"To put this into perspective, for example for cryptoasset consumers, this would mean dissuading 137,600 consumers or 3.4 per cent of new consumers per year for the benefits to exceed the costs."
The FCA said the measures were a central element of its Consumer Investments Strategy, published in September 2021, which aims to give consumers the confidence to invest and reduce the number of people who are investing in high-risk products that are not aligned to their needs.
The FCA is inviting feedback on its proposals by March 23, 2022 and said it will consider all feedback before determining its final rules and, subject to the responses received, intends to confirm its final rules in summer 2022.
sonia.rach@ft.com
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