City watchdog prepares to clampdown on ‘high risk’ investments as consultation closes
The city watchdog has closed a consultation on the promotion of so-called high-risk investments today as it looks to clampdown on the misleading marketing of a range of alternative asset classes.
The Financial Conduct Authority opened the consultation in January to look into investors’ access to areas including investment-based crowdfunding, peer-to-peer lending agreements and a new asset class called long-term asset funds.
Any rules to come out of the consultation will also be laid down as a framework for crypto asset regulation, which the FCA said it considers high risk due to the threat of “large and unexpected losses” and theft.
Regulators had raised concerns that the “consumer journey” for high risk investments was too smooth and misleading promotional material was rampant, allowing misinformed investors to pile into dangerous investments without proper checks and balances in place.
The watchdog said too many consumers are “just clicking through and accessing high-risk investments without understanding the risks involved” in its consultation in January, and it was now looking to clampdown on the rules by firming up its classification of high-risk investments.
But top retail investment firms have said the FCA needs to go further in its plans to firm up the definition of “high-risk” and bring more assets under the restrictions.
“‘High risk’ means different things to different people – whether saving, investing, or gambling with their money,” said Moira O’Neill, Head of Personal Finance, interactive investor.
“For many, high risk would mean investing for five years in a 100 per cent equity ISA. To others, high risk might be a long-term investment in a fund with a 50/50 shares/bond split.”
O’Neill said the proposed new risk scale proposed by the FCA – which bundles investments into three buckets of readily realisable securities, restricted mass market investments and non-mass market investments – did little to protect investors.
Analysts at retail investment platform Hargreaves Lansdown, which contributed to the consultation, have similarly called on the FCA to go further in its classification of different asset classes.
“There remain some concerns, notably a two speed categorisation that puts Long Term Asset Funds as higher risk than crypto assets,” Nathan Long, senior analyst at Hargreaves Lansdown said.
“There’s also room for the FCA to go further, an outright ban on using credit cards to buy higher risk investments would be sensible, as would a greater burden on firms to police maximum allocations and report on the buying experience on a regular basis. As a data led regulator the FCA has a great opportunity to improve this area of the market.”
The FCA will now review the responses to the consultation and is set to lay out a framework later this year.