The Financial Conduct Authority (FCA) is asking for views from members of the financial services sector on how to tackle the issue of high-risk investments, despite admitting that it has "limited powers" over their issuers.
In the discussion paper, published on Thursday (29 April), which follows the regulator's call for input paper launched last September, it asked for views on three areas where changes can be made to protect consumers from harm.
Firstly, the classification of high-risk investments which determines the level of marketing restrictions that applies to that investment. The regulator said it is seeking views on whether more types of investments should be subject to marketing restrictions and what restrictions should apply.
Secondly, the FCA is requesting views on the segmentation of the high-risk investment market as it is concerned too many consumers are investing in inappropriate high-risk investments. It said it is considering what improvements can be made to risk warnings.
Finally, the FCA wants views on the responsibilities of firms that approve financial promotions. It said: "Firms which approve financial promotions for unauthorised persons play a key role in ensuring those promotions meet the standards we expect."
It said it is therefore asking for views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis.
As part of its call for sector opinions, the regulator is asking for answers to questions such as:
• Are there any investments which are not currently subject to marketing restrictions which should be?
• Should there be changes to how certain types of investments are currently classified for the purposes of our financial promotion rules to prevent arbitrage in the context of our SIS rules? (If yes, what changes are needed?)
• Are there any other features of an investment which means they are generally inappropriate for retail investors and should be subject to a mass-marketing ban?
• Do you think more requirements should be placed on firms to ensure the accurate categorisation of retail clients?
• Do you think visual based risk warnings should be introduced for high-risk investments?
'Limited powers' addressed
Elsewhere in the paper, the FCA admitted that it has "limited powers over many issuers of high‑risk investments" because they are often not carrying out a regulated activity when they issue an investment product, and so are unauthorised persons.
"In particular, this means that we cannot generally impose requirements on the issuers of high‑risk investments themselves as these issuers are often not subject to our rules," it said.
"However, we can make rules on how they market their investments. These apply when an authorised firm approves or communicates the financial promotions related to those investments.
"We can also make rules which apply to firms when they carry on regulated activities by intermediating the sale of these investments."
The FCA said that this feedback will help shape the rules it plans to consult on later this year and ensure they are feasible for firms to implement. The deadline for submitting this feedback is 1 July.
Sheldon Mills, FCA executive director - consumers and competition, 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," he said.
"Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don't meet their needs."
This article first appeared on our sister title Professional Adviser
