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'Too many scams and scandals': City watchdog investigates consumer investment market

FCA
Financial Conduct Authority log at its headquarters in Canary Wharf, London. Photo: Chris Helgren/Reuters

The UK’s top financial watchdog has started a wholesale review of the consumer investment market, saying the sector is beset by “too many scams and scandals”.

The Financial Conduct Authority (FCA) kicked off the investigation on Tuesday, calling for input from experts and market participants on how consumer investments might be reformed.

“The consumer investment market is not working as well as it should,” the FCA’s interim chief executive Chris Woolard said in a statement. “There have been too many scams and scandals and too often consumers are offered unsuitable products or advice. As a result, many consumers lack confidence in the investment market.

“This call for input is aiming to help shape the future of consumer investments, including regulation, to ensure consumers can have faith in the market.”

READ MORE: Britain suffering financial crime 'epidemic', watchdog warns

The root-and-branch review follows a string of scandals in recent years that have seen ordinary investors lose hundreds of millions of pounds.

The most high-profile scandals have been in the so-called “mini-bond” market, a relatively new corner of the investment landscape. Companies have been selling high-risk bonds in startup companies and property investment schemes to retail investors online. Many are unaware of the risk.

Charles Randell, chair of the Financial Conduct Authority, said last year Britain was facing an 'epidemic' of financial crime. Photo: Hannah McKay/Reuters
Charles Randell, chair of the Financial Conduct Authority, said last year Britain was facing an 'epidemic' of financial crime. Photo: Hannah McKay/Reuters

BondReview.co.uk, a blog that tracks the space, found investors had lost almost £1bn ($1.29bn) investing mini-bonds in just the first eight months of 2019. Yahoo Finance UK last year highlighted the case of a retired doctor who lost £50,000 investing in a mini-bond advertised by a former Liberal Democrat trade minister.

The highest-profile collapse in the mini-bond market was London Capital & Finance (LCF), which went bust at the start of last year. The company had raised over £230m selling mini-bonds to more than 11,000 investors, many of whom thought they were buying government-protected ISAs. The Serious Fraud Office is investigating the case and LCF’s administrators are taking legal action against former owners.

READ MORE: Government 'unsympathetic' to major bust bond scheme investors

The FCA has struggled to get to grips with the mini-bond crisis, arguing that it was beyond its powers to intervene because mini-bonds are unregulated. The FCA eventually banned online advertising of mini-bonds last December, but critics say the move has been largely ineffective.

Problems are emerging in other corners of the consumer investment market too. The FCA wrote to financial advisers in January saying too many people were being given bad advice on pensions freedoms, which allow retirees to take cash out of their pensions early.

Charles Randell, the chair of the FCA, warned last September that Britain was facing “a very serious epidemic” of financial crime. Randell said internet companies such as Google, which can act as unofficial introducers for scams, are not doing enough to tackle the problem.

READ MORE: 'Perfect storm' blamed for scandals like London Capital Finance

Woolard said on Tuesday: “We’ll be considering all contributions carefully as we open this debate on the future of the consumer investment market.”