On 15 September 2020, the FCA launched a “Call for Input: The Consumer Investments Market”. “Enabling effective consumer investment decisions” was one of the FCA’s 5 key priorities over the next 1-3 years as set out in its 2020/21 business plan, published in April.
While Christopher Woolard’s foreword is focused on addressing regulatory “harms”, the paper ranges from how to address scams and ensure that consumers are adequately compensated, to asking how consumers can be better served by new investment products and advisory models to meet straightforward investment needs.
The call for input looks across the whole market and considers whether there are “systemic issues that need to be fixed“.
Woolard states: “The consumer investment market is not working as well as it should. Too often consumers receive lower returns than they should because of unsuitable products with high fees. Too often there have been scams and scandals in this market leading to consumer loss. Too often consumers leave their savings in cash because they don’t have confidence in the alternatives.”
Key areas of the review
Most of the 39 questions inviting a response in the paper are open questions. In its broad and open approach, and in some of its content, the paper follows the ongoing Financial Advice Market Review (FAMR) launched in August 2015 which looks (more narrowly) at how to facilitate affordable and accessible financial advice / guidance to everyone. FAMR has already brought about some regulatory change with further findings due later this year.
While the paper is merely a call for input, it does suggest that the FCA may be contemplating a more interventionist approach and some potentially significant regulatory changes, as follows:
- The FCA questions the effectiveness of current risk and costs disclosures and solicits views on ‘just in time’ education – this could entail a firm directing a client to a “small burst” of education just ahead or at the point of sale. Such a step would clearly add friction to the sales process.
- The FCA suggests that firms could take a more ‘outcomes-focused approach’, requiring them to satisfy themselves that their customers understand the products they choose. The FCA states that it will explore this further in its Duty of Care Feedback Statement. The prospect that firms could have a statutory Duty of Care to clients remains highly controversial.
- The FCA asks whether additional safeguards should be in place for consumers who invest, without advice, directly through online platforms, again adding friction to the sales process.
- Whilst appreciating that some investors should be able to invest in higher risk investments (e.g. minibonds), the FCA considers:
- whether the risks of such investments should be clearer and presented in a standard form like a prospectus;
- whether such investments should be subject to continuing disclosure requirements; and
- significantly, whether the ‘high net worth’ financial promotions exemption should be updated given that the thresholds for annual income of £100k or more, or more than £250k net assets have remained unchanged for 20 years. Such a change would further restrict access to unregulated investments. Any change in the exemptions would require legislation.
- The FCA revisits how high-risk firms can be required to pay more for industry-wide redress and compensation, for example through the FSCS, on the ‘polluter pays’ principle. The FCA considers the following possible approaches:
- firms holding more capital, based on the risk that their business appears to present;
- changing the type and amount of Professional Indemnity Insurance advisers are required to have; or
- requiring ‘riskier’ firms to pay more towards the FSCS. Of course, rigorously and consistently identifying firm or product risk is challenging.
- The FCA is also ramping up its response to investment scams, in particular:
- looking at ways to ensure that more care is taken by internet platforms, including search engines and social media platforms, before advertisements for online financial products are accepted and that faster action can be taken to have scam ads taken down; and
- launching a consumer harm campaign to warn consumers of the dangers of scams and high risk, illiquid investments and to help them make better investment decisions.