The Financial Conduct Authority (FCA) is seeking industry views on how to improve the consumer investment market.
Its latest call for input (CFI) asks players within financial services to submit feedback on how to improve consumer outcomes and protect them for financial harm.
The regulator said that, in the current market, too often investors receive “lower returns than they should because of unsuitable products with high fees”.
And with over 27,000 financial advisers and more than 5,000 advisory firms currently operating in the sector, people need to have the confidence to trust the advice they are being given, it added.
As a result, the FCA has made the reduction of harm in the consumer investment market a top priority in its 2020/21 business plan.
‘Too many scandals’
The CFI is asking industry players to provide views on:
- What more can we do to help the market offer a range of products that meet straightforward investment needs?
- How can we better ensure that those who have the financial resources to accept the risks of higher risk investments can do so if they wish, but in a way that ensures they understand the risk they are taking?
- How can we use the regulation of financial promotions to make it easier for people to understand the level of regulatory protections afforded to them when they invest?
- What more can we do to ensure that when people lose money because of an act or omission of a regulated firm, they are appropriately compensated and that it is paid for fairly by those who cause the loss?
- How can people be better protected from scams?
- How do we help this market to be competitive, with firms striving to offer better products and services?
Christopher Woolard, interim chief executive at the FCA, said the move stems from the “too many scams and scandals” that have hurt clients, as well as the frequent offering of unsuitable advice and/or products.
“As a result, many consumers lack confidence in the investment market.”
One of the most prominent scandals is the collapse of London Capital & Finance, where over 11,600 investors lost around £237m ($309.6m, €262.5m) after being mis-sold mini-bonds.
It has prompted an investigation into the watchdog’s handling of the situation, as well as a lawsuit against the Financial Services Compensation Scheme (FSCS), which was recently greenlit by the UK courts.
Clear purpose
Woolard continued: “This call for input is aiming to help shape the future of consumer investments, including regulation, to ensure consumers can have faith in the market.
“We’ll be considering all contributions carefully as we open this debate on the future of the consumer investment market.”
The FCA said the action follows its temporary ban on the marketing of speculative mini-bonds to retail investors, which was made permanent in June 2020.
Nathan Long, interim head of policy at Hargreaves Lansdown, said: “The purpose of the regulator’s wide ranging call for input is clear, they’re trying to ensure people can better navigate financial services to invest for the future, getting the help that’s right for them.
“For some people that’s personalised guidance to narrow down options, for others it is advice, but it’s clear that being locked into on-going advice when it’s not needed isn’t top of the FCA wish list right now.”
Do right by the firms too
Long argues that there is a shift in focus from the FCA “to ‘just in time information’, a recognition that to help people save and invest their behavioural biases needed to be harnessed”.
“Current rules mean providers, instead, force would-be-investors to trawl through huge levels of information, many simply then give up on their goal of investing and remaining in cash.
“The FCA’s right to flag that it can’t stop all scams. If the level of guidance and just in time information improves, people’s own resilience to scams will grow as their ability to spot when something is simply too good to be true.”
Steven Cameron, pension director at Aegon, says the CFI reminds him of the Financial Advice Market Review.
“Topics under consideration include mass market versus high-risk investments, the advice versus guidance debate, consumer compensation and how to ensure ‘polluter pays’, scam prevention and technological innovation. There’s likely to be something here that every adviser firm across the UK will have an interest in.
“It’s important that the FCA does keep a focus on protecting people from scams and stamping out the small minority of poor advice. But this needs very different treatment from supporting the growth of a market which can support more people in the way that works for them, cost effectively.
“At the heart of this, we need to make sure the vast majority of highly professional financial advice firms aren’t burdened with ever increasing FSCS levies or professional indemnity premiums.”
The right kind of education
Jane Goodland, corporate affairs director at Quilter, however, believes the regulator’s focus on financial education is not going to be enough to achieve the goals set out in its business plan.
“Pointing to meta-analysis, [The FCA] says that financial education is not as effective as ‘just in time’ education, or nudges, to improve financial behaviours.
“The meta-analysis itself points out that financial education, like other forms of education, decays over time. A statement that seems to suggest that any education is pointless at younger ages and severely misses the point of financial education, particularly in primary school.
“The main emphasis of financial education in young children is not about specific knowledge retention, importantly it is about the habits and behaviours, and the relationship with money that children develop at that age.
“Instilling the value of saving, delayed gratification and an overall consideration of how money works is something they will carry with them whether or not they can tell you specifically what AER, APR or compound interest means.
“‘Just in time’ education absolutely has a place in an overarching plan to help people make decisions with their money, but these nudges would be more effective if people already have a good basis of financial literacy.”
Law must keep up with scams
That is exactly why financial advice and professional planners exist, Goodland argues.
“As an industry, we should not waste the opportunity to work together to crack the problem of offering meaningful financial guidance.
“The FCA has recognised, once again, that the current scams regime is not fit for purpose and that the government should include fraud within scope of the Online Harms legislation. As scams evolve, the law must evolve too, but this has not happened, and savers remain exposed to considerable financial harm online.
“There is a blind spot in the regulatory system that leaves the FCA powerless to prevent scammers advertising fictitious investments on search engines. All they can do is pay for their own adverts to appear online, warning consumers of the risks of online investment propositions, all the while generating income for the search engines.
“Including financial scams within scope of the Online Harms legislation would, for the first time, place a duty on search engines and social media platforms to protect their users from scams,” she added.
