By Jean-Baptiste Andrieux, 29th April 2021.

The FCA has fired a warning shot against individuals who use loopholes to promote high-risk investments.
It published a discussion paper this morning setting out tougher measures to strengthen financial promotion rules for high-risk products.

The proposals are aimed at helping retail investors make better decisions and follows feedback to the call for input on consumer investments.

The paper focuses on three areas: the classification of high-risk investments, the segmentation of the high-risk investment market, and the responsibilities of firms approving financial promotions.

The regulator wants to find the right balance between consumer protection and responsibility for their own actions.
It also wants to identify any unintended consequences of these changes before consulting on rule changes later this year.

FCA executive director, consumers and competition Sheldon Mills said: “We have been clear that we want to deliver a consumer investment market that works well for the millions of people who stand to benefit from it. We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses.

“We have already taken action by banning the mass-marketing of speculative mini-bonds. We continue to address harm in this market through our ongoing supervisory and enforcement action
but recognise more needs to be done. Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don’t meet their needs.”

Trade body PIMFA has welcomed the FCA’s proposals to strengthen rules around financial promotions for high-risk investment products.

“The FCA is right that high risk investments carry a higher risk of consumers losing money and for many mass market consumers, they will be inappropriate. This discussion paper shows that the FCA is serious about reducing consumer harm by addressing the drivers proactively before it has been allowed to develop within the market,” said PIMFA senior policy adviser Simon Harrington.

On the other hand, law firm CMS has been very critical of the proposals.

“This discussion paper offers only a fractional solution to a far wider issue. The FCA proposes rule changes – more risk warnings, marketing bans and possibly on-line tests before you can invest in high-risk products. But this will only make limited difference unless a great many more things happen. These mainly require legislation, and it is a shame that the FCA has not flagged this more clearly,” said CMS financial services partner Simon Morris.

Morris pointed out that much of the firms causing harm are operating beyond the “regulatory perimeter”. He suggested to tighten statutory exemptions, as unregulated firms use this legal loophole to promote their goods and services without any supervision.

He also stressed that the FCA had no power over internet where most fraudsters market their scams.
Google and Facebook have been under fire for hosting scammers’ advertisements on their platforms. The FCA has warned that social media giants are acting too slowly when it comes to curbing online scams.

Morris added the suggestion an FCA-authorised firm takes more care when approving an unauthorised firm’s advertisement will make little difference as long as it remains an unregulated activity.

Recent research commissioned by the FCA exposed a growing trend of retail investors purchasing high-risk investment products that meet either their saving goals or investment needs.

The research found that 45% of them did not consider “losing some money” as a potential risk of investing.
Minister of state for digital and culture Caroline Dinenage revealed last week that the government will consult on online fraud measures “later this year”.

This announcement came after several players across industry urged the government to include online investment scams in the Online Harms Bill.

The FCA is looking to receive feedback on the current paper before 1 July 2021.

It will examine the reactions to the paper alongside further analysis and testing.

 

FCA signals crackdown on promotion rules for high-risk investments