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HCR Law Events

7 July 2021

FCA seeks to improve investment market: top tips on protecting yourself from high-risk investments

The Financial Conduct Authority (FCA) announced that their business plan 2020/21 would prioritise consumer investments. Their call for input on the Customer Investments Market (CFI) was published in December 2020, leading to a discussion paper which looked at strengthening financial promotion rules for high-risk investments and firms approving financial promotions (DP21/1).

The CFI highlighted a key theme preventing consumers from investing in inappropriate investments, which do not meet their needs. In response to this the FCA have identified three main areas where they would look to strengthen their rules.

  • Their classification of high-risk investments
  • Further segmenting the high-risk investment market
  • The role of approving financial promotions for unauthorised persons and checking for compliance with the FCA’s rules.

 

Why now?

The pandemic has accelerated many contributing trends. The FCA’s Financial Lives survey data suggests that 6% of adults with investments increased their holdings of high‑risk investments during the pandemic, despite a widespread increase in consumer vulnerability.

We are experiencing lower interest rates which motivate more consumers towards riskier investments to generate a higher rate of return. With advances in technology, such high-risk investments are more accessible than ever. The FCA found from their research that 45% of self-directed investors said they did not view ‘losing some money’ as a potential risk of investing. This was particularly acute among those that had invested in the high‑risk end of the market. Also concerning to the FCA, the discovery that new investors (those that have been investing for less than three years) are more likely to use online investment platforms and rely on social media for sources of investment information.

 

How you can protect yourself?

If you are considering investing, we set out below our tips when considering investing.

 

Guidance or advice?

When seeking assistance with a potential investment, be aware of the difference and how this can impact on your decision making.

Guidance should provide you with information about the various options available to you but should not recommend any option over another. However, financial advice should inform you which specific product would best suit your needs.

If in doubt, it is sensible to speak to an authorised independent financial adviser before making any decisions.

 

Personal considerations and questions to reflect on

Are you planning for a particular event? How much “spare” money do you have to invest? How much risk are you prepared to take with that money? How long can you tie up the money for?

Make an investment plan

Once you’ve reflected on the important questions and you are clear on your needs, consolidate this into a plan.

Diversify

To improve your chance of a better return this often includes more risk. This can be managed by balancing between risk and return by spreading your money across different investment types.

Check the charges

Whether the investment is share or investment funds, there are likely to be dealing charges. Make sure you understand the charges involved before making the investments.

Try to avoid high-risk investments

Unless you are confident you fully understand the specific risks and are happy to take them on, ideally only consider higher risk products once you’ve built up money in low and medium-risk investments and understand the risks to your capital.

Regularly review

Don’t stock watch but be aware of how your investment is doing and be prepared to switch if it’s not preforming in line with your needs.

It is important to know which public bodies can offer impartial guidance.

The Financial Conduct Authority (FCA)

Their website provides information on; how to protect yourself from scams, which advisers are regulated by the FCA, how to complain should something go wrong and how to claim compensation.

The Pensions Advisory Service or Pension wise

Can provide free and independent guidance on private or workplace pension matters.

The Money Advice Service

Free and impartial money advice service.

The Financial Ombudsman Service

Can investigate problems involving most types of money matters.

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About the Author
Adam Finch, Partner

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