FCA fleshes out plan to protect investors

interactive investor comments on financial regulator's plans to tackle investment harm.

The Financial Conduct Authority (FCA) has today unveiled a new strategy aimed at improving the investment market, giving consumers greater confidence and understanding of risks and the regulatory protections provided.

Richard Wilson, CEO, interactive investor, says: “In the digital world you can drag in 200,000 customers in a couple of months through clever UX on an app. And at the point of sale the customer sees “FCA Regulated” and thinks it must be ok. But do they know if they are in a bank, with an investment platform, or effectively in a casino?  How companies describe themselves is not regulated. The FCA needs to make it clear if people are walking into a casino or a pension company.

“We agree that accessing the right support is crucial to enabling consumers to make investment decisions, but this does not have to be face to face with an expensive adviser. Online guidance and tools can lead to good outcomes too. Our latest Private Investor Performance Index showed that our DIY customers, in median average terms, have performed well over the past 18 months up to the end of quarter two.”

Moira O’Neill, Head of Personal Finance, interactive investor, says: “The narrative around ‘higher-risk’ investments is difficult. Crypto-currencies and crowdfunding, which the regulator seems to be most worried about, are certainly higher risk and speculative. But it is important to draw a clear line between these type of investments and well diversified, high-quality collectives like investment trusts and funds, that have led to good consumer outcomes when used sensibly over the long term. I would be disappointed to see anything that leads to consumers avoiding sensible long-term higher-risk investments such as these.”

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “The FCA’s approach of identifying the right and wrong kinds of risk is helpful. It recognises the ironic risk to financial wellbeing from being too risk averse and retreating to cash, so missing out on returns, as well as from taking a punt on ‘investments’ that are more akin to gambling and losing money.

“Young workers typically don’t take enough of the good kind of risk, which means investing a higher proportion in equities, with their pensions. This is a particularly significant misstep, as the result of an overly cautious approach could be far lower pension pots on retirement than they could have if they were a little braver earlier on. Interactive investor research found that an estimated four million workers under 40 could be missing out on higher returns because their pensions are in low-risk funds.”

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The FCA’s new strategy comes at a time when many people have dipped a toe in the world of investments for the first time - perhaps because they have had more time to consider how to make their money work harder for them in the low savings rates environment during the months of lockdown.

“The noise around GameStop and the budding popularity of cryptocurrencies has raised concerns over investment risk: do consumers truly understand the level of risk their investments are exposing them to?

“There is a particular concern over the investment habits among young people. A recent poll by interactive investor revealed that 45% of young investors aged 18-29 say their first ever investment was in cryptocurrency, and an alarming number are funding this through a cocktail of credit cards, student loans, and other loans.

“Understanding investment risk is the cornerstone of successful investment management over the long term. Risk is an inherent part of investing – and it is not a bad thing. But there are some propositions disguised as investments that amp up the stakes to levels akin to slot machines in Las Vegas.

“But taking too little risk (or no risk in the case of cash) can mean that you won’t achieve your goals, just as taking too much risk can be harmful to your long-term wealth. The right balance needs to be struck.

“It is important that investors are aware and comfortable with the different types of risks when it comes to investing. There’s a whole range of investments options out there to suit individual circumstances. The FOMO culture that is rife in today’s society could push consumers, particularly the novice investors, to taking on a higher level of investment risk for the potential of handsome returns and fast.”