FCA publishes proposals to strengthen financial promotion rules
The City watchdog has set out proposals to strengthen financial promotion rules for high-risk investments, including peer-to-peer lending.
The Financial Conduct Authority (FCA) is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, and will improve risk warnings on ads. It also wants to “ensure firms that approve and communicate financial marketing have relevant expertise and understanding of the investments being offered”.
It said that people looking to make “certain high-risk investments” would be questioned about their knowledge and investment experience, after it found many younger consumers were investing without being aware of the risks.
This would bring other high-risk investments in line with P2P lending, which already mandates appropriateness tests and categorisation for investors.
The FCA also outlined its plans to crack down on the marketing of cryptoassets, in preparation for the Treasury bringing their promotion under the FCA’s remit.
It plans to categorise crypto as ‘restricted mass market investments’, meaning that only restricted, high net worth or sophisticated investors would be able to respond to cryptoasset financial promotions.
Crypto ads will have to follow FCA rules, and be “clear, fair and not misleading”.
The FCA is inviting feedback on its proposals by 23 March and intends to confirm its final rules this summer.
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“Too many people are being led to invest in products they don’t understand and which are too risky for them,” said Sarah Pritchard, executive director of markets at the FCA.
“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.”
The proposals were welcomed by industry stakeholders.
Nathan Long, senior analyst at Hargreaves Lansdown, said that there is nothing necessarily wrong with high-risk investments, but those choosing them should ensure they understand the risks involved.
He said the FCA consultation addresses many of the key issues and “impressively harnesses behavioural insights” to improve risk disclosure.
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“Assuming these proposals come to fruition it looks likely to improve decision making and shift investing behaviour so that high risk investments largely remain small constituents of investor’s portfolios,” said Long.
Pippa Tasker, a financial services partner at law firm CMS, said the industry will welcome these proposals as it has been concerned that retail investors were not properly researching the products or their risks.
“Although some may see the proposals as too restrictive, removing cryptoassets from the reach of ordinary people, they should go a long way to stemming the growing gamified approach to investing,” she added.
The City regulator last year published a three-year strategy to enhance consumer protections in which it said it is aiming to halve the number of consumers putting money into high-risk investments who indicate a low risk tolerance or show the characteristics of vulnerability, by 2025.
There have been concerns among P2P lending platforms that tougher rules could unfairly lump regulated P2P investments in with unregulated products such as cryptocurrencies and that the regulator should rethink its high-risk categorisation of P2P.
In response, the UK Crowdfunding Association sent research to the FCA that showed investors understand the risks in the sector.