The City regulator is concerned about high-risk retail investments, including investments in peer-to-peer lending.
In its annual Sector Views report, the Financial Conduct Authority (FCA) warned high-risk retail investments could have a negative impact on consumers while doubling down on its criticism of P2P sector risk.
The FCA said that if high returns are being promised or even suggested, then this means there are higher risks associated with the investments.
The regulator said that examples of high-risk investments can include P2P lending and innovative finance ISAs which contain P2P loans.
“We have already seen examples of how inadequate wind-down arrangements can cause consumer loss and have begun enforcement action as a result,” the report stated.
“If P2P firms cannot achieve an effective run-off or transfer of business, consumers could suffer significant harm. This is particularly the case if they have invested in more speculative or illiquid asset classes such as funding property development.
“In a worst-case scenario, consumers who have lent to P2P firms may have to seek repayment directly from the end borrowers themselves.”
The regulator added that P2P providers are facing more challenging trading conditions following the Lendy and Funding Secure administrations, citing that the Lendy situation could have a wider impact in confidence in this market.
The report went on to express particular concern that high-risk retail investment products are exposing consumers to more risk than they can absorb.
The regulator said some of the highest risk products are often marketed directly to retail consumers with poor communication of the risks involved and implications that the investments are regulated, when this is not the case.
“We are committed to reducing harm in the markets we regulate,” said Christopher Woolard, executive director of strategy and competition at the FCA and interim chief executive designate.
“Our analysis of markets ensures that we do this effectively, helping us to decide where to focus our attention.
“We expect firms to be similarly focused on preventing harm and assisting us where they can, and we will continue to actively supervise all firms to ensure they achieve this.
“What is clearly apparent from the Sector Views, is that many of the harms we are seeing are created by a significant number of smaller firms we regulate or firms beyond our remit.
“The findings in the report will contribute to our upcoming business plan and the decisions we make affecting consumers, market integrity and competition.”
FCA data shows Innovative Finance ISA subscriptions grew from 5,000 in 2016/17 to 31,000 in 2017/18, while the amount subscribed rose more sharply, from £36m to £290m.
The regulator said that macroeconomic factors continue to drive change in higher-risk products, including those which are eligible for ISA inclusion.
“Sustained low interest rates have suppressed returns in safer asset classes, resulting in many consumers deciding to take on more risk in the search for yield,” the report read.
“It has led to some being tempted by promised returns from high risk, and sometimes fraudulent, investments.
“Regulatory action has also had an impact on this sector, as we have moved to prevent retail investors being exposed to products with excessive levels of risk such as CFDs and unlisted speculative mini-bonds.
“The most significant consumer harm has come directly from growing consumer exposure to investment risk.
“Some consumers have ended up in products that exposed them to more risk than they expected or can afford.
“The process through which these products are distributed, and the support network around it, has not always worked well enough to enable consumers to make good decisions.”
The report follows the FCA spending money on a Google adverts campaign which resulted in searching the term ‘ISA’ on Google leading consumers to an FCA webpage outlining the risks involved in high-return high risk investments where P2P was listed as an example alongside other investments such as land banking.
The regulator defended the campaign, saying it inform consumers about the inherent risks of high-return investments, helping consumers to make better informed investment decisions and avoid potential scams.