FCA sets out strategy to tackle consumer investment harm

The Financial Conduct Authority (FCA) has published its consumer harm strategy which aims to give people the confidence to invest and reduce the number of scams.

It said 8.6 million people in the UK have £10,000 or more in investable assets sitting in cash. By 2025, the FCA aims to reduce the number of consumers who can benefit from investment earnings but are missing out by 20%.  

It also wants to halve the number of consumers who are investing in higher-risk products that are not aligned to meet their needs.

The regulatory body will aim to reduce the money consumers lose to investment scams perpetrated or facilitated by regulated firms. Between 2020 and 2021, consumers lost nearly £570m to investment fraud, a figure which has tripled since 2018.

It will also seek to stabilise the £833m compensation bill for the Financial Services Compensation Scheme and target a year-on-year reduction in the life distribution and investment intermediation (LDII) funding classes from 2025 to 2030.

The FCA will publish metrics to assess whether these outcomes are being met.

Meeting the measures

Regulatory changes will be at the forefront of implementing the outcomes, as it will assist adviser firms to provide further help for consumers who want to invest in straightforward products.

While a new £11m investment harm campaign will address the number of people investing in high-risk investments.

To raise the quality of financial advice, the FCA will be strengthening its appointed representatives (AR) regime. A consultation will be launched later this year.

It will also strengthen its financial promotions regime in the classification of high-risk investments, further segmenting the high-risk market and strengthening the requirements on firms when they approve financial promotions.

A review of the compensation framework will also take place to ensure it remains "proportionate and appropriate", particularly where firms fail leaving behind compensation liabilities for the FSCS to address which will reduce the cost and impact of poor advice.

FCA executive director markets Sarah Pritchard said: "Investors have never had more freedom - technology has democratised the market, new products have become available, and people have better access to their life savings than before. But that freedom comes with risk. We want to give consumers greater confidence to invest and to help them do so safely, understanding the level of risk."

"The package of measures we have announced today are intended to support that - we want people to have greater confidence to invest. We also want to be able to adapt more rapidly to the changing market and be assertive where we see poor conduct and consumer harm."

FCA action has yielded results

Previous work undertaken by the FCA includes banning the mass-marketing of speculative mini-bonds, as well as ongoing work to disrupt firms and activities causing harm.

According to the FCA's Consumer Investments Data Review, which was published alongside the strategy, between 1 April 2020 and 31 March 2021, the regulatory body successfully stopped 48 new firms from entering the market which were identified as potentially harmful for consumers.

More than 1,700 supervisory cases involving scams or higher risk investments were opened, while 1,300 consumer alerts were published about unauthorised firms and individuals.

In early 2022, the FCA will also publish wholesale and retail strategies to set out its ambitions for these markets.

AJ Bell head of personal finance Laura Suter said: "The regulator is taking a two-prong approach - on the one-hand trying to get more people to invest their money rather than leave it in cash and on the other trying to shield inexperienced investors from risky investments.

"The FCA's plan is to get almost 2 million more people to invest, as its research shows 8.6 million people currently have over £10,000 investable assets in cash and it wants to reduce that by 20%. If 1.7m people invested £10,000 in the stock market, that represents a £17bn influx of money to the investment market.

"The pandemic has boosted lots of people's savings pots but most of it is idling in current accounts getting paltry returns, when in reality much of it could be invested. The issue is that lots of these people feel unable or ill-equipped to start investing. Anything the regulator can do to make taking that leap into the stock market for the first time easier and to allow providers to offer more hand-holding should be applauded."

Quilter financial planning expert Heather Owen said: "There is a dichotomy in consumer investment markets. Many savers view investments as far too risky and flee to what they believe is the safe haven of cash.

"But there is also a new breed of often younger investors who may have had additional savings during the pandemic and have chosen to pile these newfound funds into high-risk investments, leaving themselves open to heavy losses or even online scams due to their inexperience.

"Investments have never been more accessible, and retail investors can buy and sell securities, including complex options and derivative contracts, at the click of a button. This has particularly exposed young people to risks like never before."

She added: "The answer to improving both the access to investments and how they are used is to reach more with advice and improve access to financial guidance.

"The UK's advice gap has led to consumers making choices that are unsuitable for their needs or disengaging from their finances and making no choices at all. Perfectly illustrating this is the statistic from the FCA's Financial Lives survey that 45% of those who had invested without advice did not understand that they could lose money.

"A similarly, worrying FCA figure revealed that 24% of UK adults have little or no confidence in managing their money and 46% have low knowledge on financial matters. Anything the regulator can do to help improve people's access to financial advice or guidance should be top of their list when trying to encourage savers to the market in a safe way."

Matt Connell, director of policy and public affairs for the Personal Finance Society, said: "We strongly welcome the FCA's focus on reducing the number of consumers who are falling victim to scams and also reducing the number of customers who have too much of their wealth in cash, exposing them to inflation risk and missed opportunities for growth.

"This is a radical departure from previous regulatory approaches, which have tended to take the path of least resistance, reducing the risk of capital loss without considering lost opportunities for consumers.

"Trusted financial advice will be key to achieving these objectives and access to advice can only be achieved by resolving issues around the volatility of regulatory costs, including the FSCS levy and professional indemnity insurance.

"We hope the FCA and Treasury do not miss the opportunity to address these issues, which have fallen between the cracks of different institutions too many times in the past."

Sushil Kuner, principal associate at law firm, Gowling WLG commented: "This is a welcome move by the FCA, given the gulf of uncertainty that has existed up until now where clarity for customers is concerned. One of the unintended consequences of the Retail Distribution Review was that large groups of consumers were left without financial advice. The FCA's proposals are therefore very welcome in raising awareness and ensuring that consumers are investing in the right products for them. However, perhaps more efforts could be made to try and address the 'advice gap'."

First published by our sister title Professional Adviser