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FCA injects £11m into fight against investment scams

Consumers lost £570m to fraudsters in 2020-21 alone


The Financial Conduct Authority has unveiled a strategy to improve the consumer investment market in the UK.

Currently, the sector accounts for £1.6trn ($2.2trn, €1.8trn) held or invested by consumers through more than 6,000 wealth managers, advisers and platforms.

But the regulator found that there are still some areas where harm is occurring and that clients need protection from.

In its latest strategy, the watchdog aims to give “consumers the confidence to invest, supported by a high-quality, affordable advice market, which should lead to fewer people being scammed or persuaded to invest in products too risky for their needs”.

The regulator claims that by 2025 it will:

  • Reduce by 20% the number of consumers who could benefit from earnings but are missing out. At the moment, there are 8.6 million clients with more than £10,000 of investible assets in cash;
  • Halve the number of people investing in higher risk products that are not suitable for their needs. Around 6% of consumers increased their holdings’ risk during the pandemic, with 45% of self-directed investors claiming they did not realise the risks associated with it;
  • Reduce the sums lost to investment scams perpetrated or facilitated by regulated firms. In 2020-21 alone, people lost £570m to fraudsters – three times higher than in 2018; and,
  • Stabilise the £833m bill for the Financial Services Compensation Scheme, and “target a year-on-year reduction in the life distribution and investment intermediation funding classes from 2025 to 2030.


But how will the FCA manage to achieve all this?

The watchdog said it has set out a package of measures, which include:

  • Potential regulatory changes to make it easier for firms to help consumers invest in “relatively straightforward products”;
  • Unveiling an £11m investment harm campaign, to help people make better informed decisions and reduce the number of those in high-risk products;
  • Quicker detection and action against scammers;
  • Strengthening the appointed representative regime. A consultation will open later this year;
  • Expanding the financial promotion regime for the classification of high-risk investments, further segmenting the high-risk market, and strengthening the requirements on firms when they approve marketing material; and,
  • Reviewing the compensation framework so that it remains “proportionate and appropriate” and reduce the cost and impact of poor advice firms.

Sarah Pritchard, executive director of markets at the FCA, said: “Investors have never had more freedom – technology has democratised the market, new products have become available, and people have better access to their life savings than before.

“But that freedom comes with risk. We want to give consumers greater confidence to invest and to help them do so safely, understanding the level of risk. The package of measures we have announced today are intended to support that – we want people to have greater confidence to invest.

“We also want to be able to adapt more rapidly to the changing market and be assertive where we see poor conduct and consumer harm.”

Two-pronged approach

Laura Suter, head of personal finance at AJ Bell, said that, in essence, the FCA wants two achieve two outcomes.

First, get more people to invest; and, second, shield inexperienced investors from financial harm.

“The FCA’s plan is to get almost two million more people to invest, as its research shows 8.6 million people currently have over £10,000 investable assets in cash and it wants to reduce that by 20%.

“If 1.7 million people invested £10,000 in the stock market, that represents a £17bn influx of money to the investment market.

“The pandemic has boosted lots of people’s savings pots but most of it is idling in current accounts getting paltry returns, when in reality much of it could be invested. The issue is that lots of these people feel unable or ill-equipped to start investing.

“Anything the regulator can do to make taking that leap into the stock market for the first time easier and to allow providers to offer more hand-holding should be applauded.

“The benefit to investors is clear: if 1.7 million people, each with £10,000 sitting in cash, all invest their money then collectively they could make £9.8bn extra in returns over 10 years. For many of these individuals investing is a logical route, as they don’t need the safety of cash or immediate access to their money, but it’s often a job on the to-do list that people don’t get around to.

But helping people invest comes in tandem with informing them of the risks they may come across.

Suter added: “The FCA’s figures show that 6% of UK adults have invested in high-risk investment for the first time or increased their stakes during the pandemic, despite almost half of people thinking they can’t lose money on investments – clearly there is a big mismatch here between expectations and reality.

“In particular, younger people are twice as likely to put their money in risky investments without realising the potential downsides. The worst outcome for someone in their first foray into investing is to put their money in something too risky that wipes out a large chunk of their savings.”

Overly cautious

But research by Boring Money found that consumers actually over-estimate the potential capital losses linked to investing, chief executive Holly Mackay said.

“We know that many consumers do not invest because they don’t know where to start or who to trust.

“Our research confirms that consumers are very aware of the potential for capital loss – in fact they tend to over-estimate potential losses meaning they often see investing as overly risky.

“Our findings show 45% of savers with more than £10,000 in cash say they would consider investing in the future. So, while there is a general appetite to in invest, we see a confused understanding of risk and what that actually looks like in practice.

“The gender investment gap is well documented, and we see women in particular are recklessly cautious in their approach.

“Any developments which support better, more helpful dialogue with consumers about the longer-term potential of mainstream, diversified investment portfolios have to be welcomed, she added”

Not all in one basket

But Moira O’Neill, head of personal finance, and Myron Jobson, personal finance campaigner at Interactive Investor warned the FCA against creating a panic against all types of high-risk investments.

The boom of cryptocurrencies and the recent GameStop saga have shed a light on the risks that retail investors can incur if they do not take the necessary precautions.

This, however, does not mean that they should stay away from well-balanced, long-term, high-risk investments that could be appropriate to their circumstances.

O’Neill said: “The narrative around ‘higher-risk’ investments is difficult. Cryptocurrencies 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 types 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.”

Jobson added: “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?

“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.”

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