The Financial Conduct Authority is looking to clamp down on high risk investments being targeted at the general public with a range of new rules following the collapse of London Capital & Finance and other scandals.
The City regulator, which failed so badly to protect investors from LCF that the Treasury declared the taxpayer must compensate them, wants to put more types of higher risk products into the basket of those whose marketing is restricted to protect consumers.
New entrants would include peer-to-peer and equity shares products.
It is also looking to bolster the risk warnings on products so they are not just ignored by the public as “white noise” to be ignored.
Wordings often do not convey how likely it is that investors will lose their money.
One idea is to make potential investors watch a video or pass an online test to demonstrate they have sufficient understanding of the risk.
Currently, it is too easy for naive investors just to click a few boxes online declaring they understand when they often don’t.
FCA regulated firms which approve financial promotions put out by people who are not registered could be forced to take responsibility to monitor the use of the promotions continually to make sure it remains “clear, fair and not misleading”.
The FCA is seeking feedback by 1 July on the discussion paper in a bid to avoid unintended consequences of the changes.
Recent research by the FCA showed increasing numbers of people are investing in high risk investments that are inappropriate to their financial needs, potentially leading to significant and unexpected losses. Of those polled, 45% did not view losing money as a potential risk of investing.
Sheldon Mills, executive director of consumers and competition at the FCA said while the watchdog had banned mass-marketing of speculative minibonds such as those issued by LCF, Blackmore Bonds, MJS and many others, “more needs to be done”.
However, critics soon lined up to declare the discussion paper was too little, too late from a regulator found to have systemic failings when it came to protecting retail investors.
Simon Morris, partner at the law firm CMS said: “The FCA proposes rule changes - more risk warnings, marketing bans and possibly online 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..”
Morris said new laws were needed to close off loopholes allowing unregulated firms to promote their products without any supervision and the need for online financial promotions to be included in the Online Harms Bill currently going through Parliament.
He said there was little point making FCA-regulated firms more responsible for the promotions of unauthorised firms. The move would make little difference because the FCA would still be “largely unsighted” about what is happening.
Critics said the paper also failed to deal with the “regulatory perimeter” - the financial territory beyond the FCA’s legal reach where much of the riskiest investment products lurk. Many people have called for all financial products to be regulated so as to avoid dubious schemes gaming the system beyond the regulator’s reach.