The FCA has published proposals to strengthen its financial promotion rules for high-risk investments, to help retail investors make more effective decisions.

A discussion paper from the regulator seeks views on three areas where changes could be made to address harm to consumers from investing in inappropriate high-risk investments.

These three areas of focus are the classification of high-risk investments, the segmentation of the high-risk investment market and the responsibilities of firms which approve financial promotions.

The FCA indicated the feedback to its proposals will help shape the rules it plans to consult on later this year, to ensure they are feasible for firms to implement.

FCA executive director, consumers and competition, Sheldon Mills, suggested the regulator is “concerned” that consumers are too often investing in high-risk investments they don’t understand, which could lead to “significant and unexpected losses”.

“We have already taken action by banning the mass-marketing of speculative mini-bonds,” Mills said.

“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.”

Recent research commissioned by the FCA on self-directed investors identified a growing trend of retail investors choosing to invest in inappropriate high-risk investments that do not meet their savings goals and investment needs.

These findings revealed found that over four in 10 (45%) did not view “losing some money” as a potential risk of investing.

Commenting on the FCA plans, OpenMoney co-founder, Anthony Morrow, called the promotion of high-risk investments an area that “desperately needs regulatory attention”.

“Too many people are being lured into investing in products which could lose them significant sums of money by promotions that talk up the possible returns without explaining any of the risks,” Morrow commented.

“And if things don’t work out as expected, because you’ve ticked a box agreeing that you’re a high-risk investor, you have no come back against the provider. This simply isn’t good enough.
 
“There needs to be much stronger checks on whether these sophisticated investments are appropriate for an individual – in most cases they won’t be. To give the investor some protection if things go wrong, I think high-risk investments should only be sold where there has been a formal assessment, with the firm involved taking regulatory responsibility for the investment being suitable.”

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