On 15 September 2020 the FCA published a Call for Input ("CFI") focussing on the consumer investment market. This is a market that the FCA considers is not working well, with consumers receiving lower returns than expected due to high fees, or because the product is unsuitable for them.
There are a number of reasons for this. For example, many consumers do not seek financial advice because of the associated complexity and cost, and similarly firms are reluctant to provide simple advice and guidance. Consumer losses are further compounded by scams and scandals, including those conducted online and overseas which are outside the regulatory reach of the FCA. Therefore, notwithstanding the growth in stocks and shares ISAs, most consumers save their cash, rather than investing in a way which might provide higher returns.
It is important that retail investors can identify investments that suit their circumstances and attitudes to risk, and that firms make efforts to understand investor risk. The FCA is therefore considering a number of issues in the CFI, including the following.
- Accessible advice for the mass market – the FCA is seeking views on (a) how to successfully engage with consumers, to help make investment decisions less intimidating including for straightforward investment needs; (b) whether one-off investment advice (rather than ongoing advice which is generally used by wealthier consumers) will help consumers make effective investment decisions, and barriers to firms providing such; (c) whether further protections are required for consumers who invest through a non-advised platform service.
- Higher risk investments and the high net worth and sophisticated investor exemptions – the FCA is concerned about consumers investing in complex, high risk products due to online adverts or high pressure sales tactics. The FCA is seeking views on: (a) how to help consumers better understand the risks involved with their investments, noting that better disclosures alone will not address the challenges; and (b) whether the high net worth and self-certified sophisticated investor exemptions are operating well in practice, hinting that the £100k annual income / £250k net asset tests should be increased.
- Appointed representatives – The FCA is seeking views on how the appointed representative ("AR") regime is operating in practice. For example, principal firms currently notify the FCA about their ARs, rather than going through an approval process. Further, the Senior Managers and Certification Regime which is designed to make individuals more accountable for their conduct and competence does not apply to individuals within ARs, the approved person regime applies instead. The FCA queries the impact of applying different rules to the principal versus the AR.
- Scams – in the FCA's view, despite regulatory and industry efforts, too many people are falling victims to scams. For example in 2018, the average amount lost to pension scams was £82,000. The FCA is seeking views on what industry thinks are the most suitable and proportionate remedies to tackle scams, noting that although criminal law is a powerful tool, investigation and prosecution is an expensive and protracted process. The FCA has suggested including fraud within the Online Harms legislation to give the FCA more power to take down internet advertising seeking to scam people, including search engine results. Currently the FCA has to convince the online company that adverts are illegal on a case by case basis, and adverts often re-appear in a slightly different form.
The range of issues which the FCA is considering under the CFI show the level of its concern for the efficiency of this market. The CFI is just the start. The deadline for responses is 15 December 2020 but firms who deal with retail investors should keep watch for future developments in this area, it looks likely the regulator will bring about changes.
Co-author: Emma Tran, Associate
