Investors often perceive risk warnings as ‘white noise’, says FCA

Many investors perceive risk warnings as “white noise”, and often the genuine possibility of losing money does not sink in, according to the City regulator.

The Financial Conduct Authority (FCA) suggested that investors may be required to demonstrate that they have enough knowledge about financial products, by passing an online test or watching an educational video.

It made the comments as it released a discussion paper with proposals to strengthen rules around high-risk investments and help people to avoid losing money from inappropriate schemes.

Research released by the Financial Services Compensation Scheme (FSCS) this week found that one in five retirees has considered riskier investment and pensions products in the search for higher rates of interest.

The prolonged low interest rate environment may have made it more tempting for some people to consider riskier investment products.

We want your views on strengthening our financial promotions rules for high-risk investments. Respond by 1 July 2021 https://t.co/G60OR3KjHM

— Financial Conduct Authority (@TheFCA) April 29, 2021

The impacts of the coronavirus pandemic and advances in technology which have increased the availability of products have resulted in more consumers using high‑risk investments, the FCA said.

Some newer investors are using less traditional sources of information, such as social media.

The FCA’s Financial Lives data suggests that 6% of adults with investments increased their holdings of high‑risk investments during the pandemic.

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Feedback to the discussion paper will help shape rules that the FCA plans to consult on later in the year.

The FCA said it is considering what improvements could be made to risk warnings, which it said are often perceived as white noise to many investors and often do not convey the genuine possibility of an investment loss.

Other suggestions in the paper include requiring consumers to watch educational videos or to pass an online test.

This could help prevent consumers from simply clicking through and accessing high-risk investments that they do not understand.

The FCA is also seeking views on whether more types of investments should be subject to marketing restrictions and what restrictions should apply, for example for peer-to-peer agreements.

It also plans further segment high-risk investments from other investments in its rules, and wants feedback on how best to achieve this.

The regulator said preventing harm in the consumer investment market is a priority.

More than four in 10 (45%) non-advised investors did not view losing some money as a potential risk of investing, the research found.

Sheldon Mills, executive director, consumers and competition at the FCA 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.”

The FCA is inviting feedback on its discussion paper by July 1 2021.

It will consider this alongside further analysis and testing.

The FCA said it wants to understand how to strike the right balance between protecting consumers and consumers taking responsibility for their own actions, and identifying any unintended consequences of the changes.

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