Three ways the FCA wants to tackle high risk investments

Three ways the FCA wants to tackle high risk investments

The Financial Conduct Authority has today presented its plans to curb the ease and speed with which people can make high-risk investments.

As first floated in April last year as part of its consumer investments strategy, the FCA wants to force people to take an online test before they can invest in high risk assets.

The regulator also said it 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. 

The proposals primarily related to financial promotions for high‑risk investments, which are those investments which are subject to marketing restrictions under the FCA’s rules. 

This includes investment based‑crowdfunding, peer‑to‑peer agreements, other non‑readily realisable securities, non‑mainstream pooled investments and speculative illiquid securities. It will also include cryptoassets once they have been brought within the financial promotions regime. 

Here are the devilish details in today's consultation paper:

1) Marketing restrictions

The FCA is proposing changes to three key areas of the financial promotion lifecycle: approving and communicating promotions (including a new date stamp for approved promotions and a new competence and expertise requirement for firms); lifetime of the promotion (including an ongoing monitoring requirement for firms approving promotions and consumer journey); and preliminary assessment of suitability for ‘Non‑Mass Market Investments’. 

The FCA’s draft rules also proposed restrictions on the marketing of cryptoassets, in preparation for the government bringing the promotion of these high-risk investments under the regulator's 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 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."

2) Appropriateness tests

The FCA said consumer research has found that too many consumers are investing in high‑risk products that do not match their risk tolerance and are unlikely to meet their investment needs.

Under the FCA's appropriateness regime firms are required to gather information on an investor’s knowledge and experience in the relevant investment field and then assess the appropriateness of the investment for a consumer before they can respond.

The FCA said its appropriateness requirements are now often met through an interactive set of questions put to the consumer online, without any human involvement from the firm.