FCA to tighten rules to prevent investors 'sleepwalking into high-risk investments'

The Financial Conduct Authority has launched a consultation into its new rules intended to reduce the ease and speed with which investors can make high risk investments.

Under the proposed rules, the regulator would improve risk warnings on adverts, ban incentives such as new joiner or refer-a-friend bonuses and ensure the expertise and understanding of firms approving financial marketing.

Head of personal finance at AJ Bell Laura Suter described the move as a push to "make it harder for novice investors to sleepwalk into buying high-risk investments".

"There has been a boom in people investing during the pandemic, and in turn there has also been a steep rise in the number of newcomer investors putting their money in high-risk, inappropriate investments," she explained.

"The regulator admits that it will not be able to stop every low-risk or vulnerable customer from buying inappropriate investments.

"Instead, in the next three years, the FCA's aim is to halve the number of people investing in high-risk assets who have a low risk tolerance or who are vulnerable."

While there is "nothing necessarily wrong with high-risk investments", investors should understand the risks involved before committing capital, reasoned Nathan Long, senior analyst at Hargreaves Lansdown.

"Having sufficient time to invest, enough cash set aside for a rainy day and ensuring the high-risk investments are a sensibly sized part of their long-term portfolio are all important considerations," he said.

While cryptocurrencies have taken headlines of late, particularly given the UK Government announcement yesterday (18 January) that advertising the asset class would be brought under the FCA purview, the new rules affect a much wider scope of investment.

The proposals would see mini-bonds, peer-to-peer, crowdfunding, non-readily realisable securities and non-mainstream pooled investments all brought under the new rules.

Long term asset funds have been largely excluded from the new proposals to prevent duplication of rules when the regulator issues its response to the recent consultation on the model later this year.

Sarah Pritchard, executive director of markets at the FCA, said: "Too many people are being led to invest in products they do not understand, and which are too risky for them.

"People need clear, fair information and proper risk warnings if they are to invest with confidence, which is the central aim of our consumer investment strategy."