On 15 September 2021, the Financial Conduct Authority (“FCA”) published a three-year consumer investment strategy plan (the “Strategy Plan”), in consideration of responses received in relation to its call for input focused on reducing harm in the consumer investment market, circulated a year ago.
In this Strategy Plan, the FCA offered more details on its strategy by explaining the work it will be undertaking to ensure that consumers can invest with greater confidence, as well as setting out goals to achieve by 2025. These goals include reducing the number of consumers who are missing out on the opportunity to benefit from an uplift of up to 20% in their investment earnings, to reduce investment loss as a result of scams, and to stabilise the compensation bill for the Financial Services Compensation Scheme (“FSCS”), which is currently at £833 million.
THE CONSUMER INVESTMENT MARKET TODAY
The reasons the FCA developed this three-year strategy are to improve the current consumer experience and create the right environment for consumers to invest, the importance of which is highlighted by the long-term social and economic changes that have taken place within the consumer investment markets in recent years.
As consumers are burdened with the increasing responsibility of making complex decisions in relation to their financial future, alongside the ever-growing selection of products and services offered, consumers are not only presented with the benefits and opportunities, but also the risk of losing their investment.
The FCA identified that:
- since 2018, the numbers of consumers losing significant sums of moneys due to investment fraud and scam has tripled in the past year, with a frightening average of £24,000 per victim;
- 6 million adults in the UK currently hold their savings in cash instead of making gains from investment, exposing the value of their savings to a risk of inflation;
- whilst consumers are increasing their investment in higher risk options, there seems to be lack of awareness as to what these risks are; and
- over 50% of adults in the UK with at least £10,000 worth of investible assets had no access to formal financial support.
THE FCA’S VISION
In light of the above findings, the FCA identified four key areas of consumer harm and set out measurable outcomes for each.
Through its recent review on the impact of retail distribution and the financial advice market, the FCA found that the majority of consumers are not being provided with the necessary support to invest appropriately with over 50% of consumers holding the majority of their £10,000 worth of investible assets in cash. While this may be appropriate for some individuals, many of such consumers are in fact missing out on the possibility of making higher returns from investing.
On the other hand, some consumers are taking on more risks than they can afford to, with double the number of young people than adults investing in high-risk investments.
In order to improve the situation, the FCA has set out the following short term strategy actions:
- set clearer and higher expectations for firms’ standards of care towards consumers, including asking firms to consider the outcomes that consumers should reasonably expect from using the firms’ products and services, and take action to achieve these outcomes effectively;
- continue to work with individual firms to support them within the use of the existing regulatory framework;
- understand what future regulatory interventions should target in relation to consumer experience to improve pension outcomes by considering the responses to the Pensions Consumer Journey Call for Input;
- stronger nudges to pension providers for offering more signposts to consumers at various stages of their journey;
- work with firms on developing guidance on fair treatment of vulnerable customers in February 2022; and
- explore ways in which the FCA and other regulatory partners can engage with and empower consumers directly.
By taking the above short-term actions, the FCA hopes that firms will make good consumer outcomes not only an objective but a priority of their business and ultimately instil more confidence in consumers to invest in the market.
Higher risk investments
The FCA identified an increase in investors investing for the first time or holding more high-risk investment since the pandemic, many of which have not understood fully the risk level associated with their investment decision. 57% of such adults showed low financial capability and 45% demonstrated a lack of awareness of the risks involved, to the point where they were not aware of the possibility of losing money through investing.
To reduce the potential harm associated with investing in high-risk investment, the FCA has already taken the following steps:
- put a permanent ban on mass marketing of speculative illiquid securities in January 2021;
- paused applications for authorisations from April 2020 to March 2021 to ensure that all firms and individuals meet the standards as set out by the FCA; and
- opened over 1,700 supervisory cases against firms and individuals controlling the firms which involved scams or higher risks investment since 2020.
To achieve its long-term goals of strengthening the financial promotion regime and better organise its approach to gathering and using information and intelligence, the FCA has set out the following short term strategy actions:
- enhance the use of data and technology to identify harm sooner;
- launch a campaign to better inform consumers of the harm associated with investment, including partnerships with influencers, social media and paid ads etc.;
- change its approach to firms’ permission in order to combat out-of-date or incorrect permissions more effectively;
- put restrictions and financial promotion rules to firms that regulate the marketing of investment, as well as be more proactive in restricting the marketing of high-risk investment when harm is identified; and
- adopt the use of web crawling and scraping tools to identify high risk financial promotions and scams so as to prevent consumer harm more effectively.
Scams and Fraud
Since 2019, there has been a dramatic increase in investment scam activity, with an 82% rise in investment and pensions calls being reported as possible scams, 54% of reported unauthorised business, 67% of investment fraud being reported and 42% of losses resulting from investment scams.
Besides its existing ScamSmart campaigns, the FCA is working to improve enforcement against fraudulent businesses. These include:
- taking actions against firms and individuals who are neither authorised nor exempt under the Financial Services and Markets Act 2000 (“FSMA”);
- continuing to offer support to consumers who suspect scam activities; and
- bringing awareness to consumers in spotting signs around scams and promoting the use of the tools available to identify potential scams.
The FCA is further committed to using online platforms, such as social media, search engines and advertisements, to reach a wider audience and draw consumers’ attention to the harm associated with high-risk investments. The FCA is also monitoring the operations of major online platforms not only to identify restrictions but also to check for firms’ compliance with the restrictions identified. A plan for further action is also underway to prevent and counter any existing fraudsters.
Consumers can seek redress for poor investment advice given through a firm’s complaint mechanism or the Financial Ombudsman Service. While the only time limit on when consumers can seek redress is dependent on the firm’s continuity, problems arising as a result of poor investment advice may not always be apparent to consumers. Despite the FSCS’ effort and resource to recover the compensation sought by consumers as a result of firms’ liability for inadequate advice, not all consumers are able to recover the full amount of losses.
To avoid consumers having to bear the cost of the firms’ mistake, the FCA has already taken the following steps to improve the quality of advice available and to reduce the FSCS’s burden:
- continue its ongoing enforcement and supervision of firms, as well as strengthen the standards firms adhere to and address poor practices;
- improve capital standard through the new Investment Firms Prudential Regime; and
- review FSCS funding to ensure a robust model of funding.
In the meantime, the FCA is also committed to improve not only the quality of advice received by consumers, but also firm resources and resilience.
To achieve the above objectives, the FCA is committed to:
- address any misuse of the Appointed Representative (“ARs”) regime by increasing supervision and scrutiny of firms, with a focus on high-risk principals;
- develop a new network analytics tool to identify dishonest firms and individuals and spot suspicious activities in hope to prevent potentially harmful firms from entering the gateway;
- investigate the impact of changes to the FCA’s adviser capital to reduce the redress bill;
- explore ways to support firms in demonstrating the quality of advice given; and
- monitor developments in the market and communicate regulatory expectations to firms.
Going forward, the FCA will engage with the Treasury on potential legislative changes to strengthen Principals and ARs regimes, consult on other changes in relation to specific capital requirements for non-MiFID adviser firms to improve their resilience and ability to remedy consumers, as well as examine the levels of compensation and consumer protection on an ongoing basis and review compensation frameworks in the event that firms are unable to pay.
The FCA has announced through their Business Plan 2020/21, that consumer investment markets would be a business priority for the coming three years and it aims to deliver its strategy by April 2023. On top of this, the FCA will publish its wholesale and retail strategies at the beginning of 2022.
To review the FCA’s consumer strategy and feedback statement, please click here.
To review FCA’s Evaluation of the impact of the Retail Distribution Review and the Financial Advice Market Review, please click here.
To review the FCA’s Business Plan 2020/21, please click here.
For more information, and any guidance or advice on the outcomes of the FCA’s Strategy Plan, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.