Cracking Down on High-Risk Investments: FCA considers industry performance

11 October 2023. Published by Ash Daniells, Senior Associate and Dorian Nunzek, Trainee Solicitor

After introducing stricter rules for the promotion of Restricted Mass Market Investments (RMMIs) in February 2023, the FCA continues to monitor the performance of firms, is conducting a multi-firm review and has outlined good and poor practices in the industry.

Recent changes to promotion of high-risk investments 

By way of background, RMMIs are types of investments which can be promoted and sold to retail consumers but are subject to specific restrictions. Examples of RMMIs include non-readily realisable securities (such as shares in an unlisted company, Peer-to-Peer agreements, Peer-to-Peer portfolios, and certain qualifying crypto assets). As the name suggests, they are often high-risk investment vehicles for retail consumers.

The FCA have been open in their desire to reduce the number of individuals investing into RMMIs and, in August 2022, published a report which required companies to use clear warning signs on their websites for consumers dealing with these risky investments. The FCA's goal was for firms to make it clear that the investments are high-risk and that any recommendation appropriately matches an investor's attitude towards risk. The new rules also banned bonuses, gifts, and other incentives in connection with these investments. The new (stricter) rules were introduced between August 2022 and February 2023. 

FCA's recent review 

The FCA has recently conducted a review to establish how well firms were complying with the new regulations. 

The FCA assessed 13 firms against 5 different criteria:

1. Incentives to invest;
2. Cooling off period;
3. Risk warnings;
4. Client categorisation; and 
5. Appropriateness. 

The FCA considered how these firms dealt with the new regulations around RMMIs under each of the five headers and have now released a report outlining the good and bad practices that they have observed in their assessment. 

What's made the FCA happy?

The FCA highlighted examples of good practice, which included providing clear and accurate information regarding each investment, providing consumers with additional tools to help them understand and calculate their net worth and subsequently warning customers that the RMMIs may not be suitable for them if they did not meet the requirements outlined in their surveys. This last finding supports what the FCA has often been keen to reiterate - that advisers shouldn’t simply agree with whatever is requested by customers – advisers should challenge customers to make sure that they are getting the best outcome for them.

The FCA also praised firms for providing consumers with resources to carry out their own research to understand the products offered and the associated risks with the investments. So, if you’re a customer looking to invest, you might expect some more homework from your adviser! 

What can firms do to improve?

The FCA weren’t entirely happy though. Examples of poor conduct included consumers being asked leading or simplistic questions that directed the consumer to the 'right' answer, altering the risk warnings to deviate from the wording within the FCA regulations and re-naming the categories or describing the categories in a manner which downplayed the risks of investing. 

The FCA also found certain firms did not meet the prominence requirements for the risk warnings and some designs reduced the prominence of these warnings. Indeed, some firms confirmed their marketing teams were unhappy at the requirement for prominence of the risk factor, on the basis that it might put customers off. 

The Next Steps 

The FCA now expect firms offering RMMIs to review their recent report and carefully reflect on the examples of good and poor conduct provided, before considering if internal operational changes need to be made. It might seem that firms have a small period of grace to make changes, however the FCA are unlikely to be quite so forgiving if a further review finds there are still failings.  

We anticipate that the FCA will keep heavily monitoring to shield consumers from making unwise investments which are not adequately labelled as high risk. Firms should stay vigilant and responsive to the changes and recommendations imposed by the FCA to avoid further criticism and stringent investigations – after all, the FCA has confirmed they will look to take robust action against firms not complying. 

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