Retail investors exposed to too much risk, says City watchdog
Retail investors are being pushed into purchasing higher risk products that expose them to more risk than they can afford, the Financial Conduct Authority (FCA) has warned.
In its annual report on the areas that could harm consumers, the City watchdog said that the sale of “unsuitable or fraudulent products” represents the most significant harm in the retail investment sector.
But the FCA warned today that some of the highest risk products are offered by companies that are not regulated, while others are being marketed by firms that are only regulated for other activities.
“These are often marketed directly to retail consumers, often with poor communication of the real risks and implying that the investments are regulated, when they are not,” said the watchdog.
There have been a series of regulatory clampdowns on high risk investments in the wake of scandals including the collapse of mini-bond seller London Capital & Finance (LCF).
In November, the watchdog set out to ban the mass marketing of speculative mini-bonds such as those sold by LCF to ordinary investors, but the FCA is only able to regulate the selling of the bonds, not the products themselves.
The government was criticised by MPs in October for refusing to back a policy that would allow the financial watchdog to recommend changes to its remit, after FCA chairman Charles Randell warned that “bad people” were exploiting regulatory loopholes.
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Outgoing FCA boss Andrew Bailey, who will take over from Mark Carney as governor of the Bank of England next month, recently described investors’ exposure to higher risk assets as “one of the things that worries me most”.
In today’s report, the FCA said that “sustained low interest rates have suppressed returns in safer assets classes and meant many consumers have taken on more risk in the search for yield.”
This has led to some ordinary investors “being tempted by promised returns from high risk, and sometimes fraudulent, investments”.
Christopher Woolard, the FCA’s executive director of strategy and competition and interim chief executive, said it was “clearly apparent” that “many of the harms we are seeing are created by a significant number of smaller firms we regulate or firms beyond our remit”.
‘We are committed to reducing harm in the markets we regulate,” he said. “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.”