There are many different types of investors, with many different definitions of risk levels. A new paper from the FCA sets out its strategy for the next few years to minimise risk for consumers investing.
The regulator’s goal is to make sure consumers can invest with confidence and understand the risks taken for each investment as well as the regulatory protections provided. This month the FCA unveiled its latest report, Consumer Investments: Strategy and Feedback Statement, which aims to set out the regulator's view on consumer harm and a three-year strategy to address it.
The FCA does not want to "restrict consumers" if they want to invest but also have the ability to access and identify those which suit their circumstances and attitude to risk. The main goal is for investors to be able to access higher risk investments knowingly and be protected from scams.
It is estimated that 3.2 million consumers have £314 billion in a Stocks & Shares Isa, HMRC data shows. According to MiFID data from July 2021, 7.1 million new consumer investment accounts were opened in 2020/21, 2.8 million new consumer investment accounts opened with the four largest trading app firms.
In that time, £569 million has been lost to scams, with the average amount being £24,000 lost between in April 2020 and March 2021.
Younger people are twice as likely to have invested in higher risk investments, the regulator says. For example, 44% of cryptocurrencies and 31% of crowdfunding investments are held by people under 34. These younger consumers are getting involved in high risk investments, with nearly two thirds of whom claim a significant investment loss would have a fundamental impact on their current or future lifestyle.
Why Aren't People Taking Advice?
With only 8% of UK adults receiving financial advice, and 1.8% of adults making use of online robo-advice, it is more important than ever for the regulator to be making sure consumers are protected.
Reasons for not seeking advice over the past 12 months vary, with the majority (50%) claiming they had no need to use an adviser, and 28% believing decisions could be made on their own.
But what exactly is the FCA doing to help? The actual guidelines will not be published until next year, but we have been given a glimpse into what is going to be expected.
The rules that govern guidance and advice may be changed again. The FCA admits that while many firms want to do more to guide consumers to investment products which are right for them, there are concerns about inadvertently crossing the boundary between guidance and advice. With this comes concerns about liability for inappropriate advice. Faced with this perceived uncertainty, many firms said they were hesitant about developing more personalised guidance services.
In the responses to its Consumer Investments Market call for input paper, it showed that a clearer, more consistent labelling of investment products would help consumers, and more standardised terminology and use of traffic light warnings could also identify different levels of risk.
In the short term, the FCA says it will continue to act against firms and individuals who are causing consumer harm, as well as directing consumer support through its helpline.
How to Spot Harm
The FCA will be using data and technology to continue to spot the harm, including automated red flags, told using advanced analytics and dashboards to combine data.
Investment scams have grown significantly in the past few years, with fraud volumes growing every year. There have been several factors contributing to creating opportunities for scammers, including social media and digital distribution provide channels for scammers to target. The regulator says the number of consumers calling the helpline about scams through social media more than doubled in 2020. Boiler rooms scams see the highest number of scams, followed by cryptocurrencies.
The FCA's publication states first that poor advice given generates a liability. While this is true, the claims from poor advice from a qualified financial adviser are few and far between, with the majority of scams and poor investments coming from direct investors with no advice or guidance being taken.
The FCA's next business plan will be delivered by April 2023, so investors are being left for the next few years without any proper guidance of how to make sure you are investing safely - particularly as it states it aims to have a 20% reduction in the number of consumers with higher risk tolerance holding over £10,000 in cash by 2025. It is also seeking to reduce the amount of money consumers lose to investment concerns by 2025, from the £569 millio lost in 2020/21 as its baseline.
The strategies for wholesale and retail and ambitions for those markets is due in early 2022, so whether there will be changes announced then is yet to be seen.
