Proposals to strengthen promotion rules for high-risk investments ‘miss a broader point’

interactive investor comments on today's proposals from the City watchdog.

In a world of TikTok investment influencers and bitcoin advertisements on the London Underground, interactive investor is supportive of the FCA’s efforts to protect consumers from inappropriate sales practices in today’s DP 21/1 discussion paper.

However, interactive investor, the UK’s second-largest direct-to-consumer investment platform, is concerned that today’s proposals miss a broader point.

Richard Wilson, CEO, interactive investor, says: “How companies describe themselves is not regulated. The term ‘FCA Regulated’ does not tell people whether they are walking into a bank, an investment platform, or effectively in a casino. ‘FCA regulated’ doesn’t mean very much when you have lost your shirt by inadvertently investing in complex instruments without even realising it.

“Regulatory perimeters need to be tightened along with advertising.”

One example of this would be the operating models employed by firms involved in spread-betting and CFDs, where it can be unclear whether such services offer an underlying equity dealing service or contracts for difference (CFD) service (or a combination of these services). In combination with active marketing campaigns, those customers could find themselves caught in a rather opaque relationship, inadvertently investing into complex derivative products.

Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “In a world of TikTok investment influencers and bitcoin advertisements on the London Underground, and at a time when some people are feeling flush after lockdown and keen on finding quick ways to make a profit, there are real risks that people will succumb to high-risk investments that aren’t right for their circumstances.

“The appropriateness of risk for individual circumstances is key here. The regulator is not saying that all risk is bad, but that some high-risk investments, even if legitimate, may be completely inappropriate.

“It’s hard, as in some circumstances, taking higher risk is the right course of action. There are also more reasons to invest than ever before, with interest rates so low – so genuine reasons that more people could consider investing for the long term. But it’s about taking the right kind of risk.

“It’s becoming increasingly difficult for everyday investors to work out what is and isn’t legitimate though, too. There’s a ‘Wild West’ feel to some elements of the investment market now. It makes doing your own research and building up knowledge for yourself all the more important. Checking the credibility of firms and also working out whether you can afford to lose all your capital is also important.”

Myron Jobson, Personal Financial Campaigner, interactive investor, says: “Protecting and helping investors understand the dangers of high-risk investments is crucial following a year in which has seen a rise in the number of people dipping a toe into the world of investments for the first time. Risk is an inherent part of investing, but some propositions amp up the stakes to levels akin to slot machines in Las Vegas, and the worry is that investment novices might take on too much risk and find themselves racking up some painful investing lessons.

“It is clear that the City watchdog believes that the ‘out of sight, out of mind approach’ will work when it comes to high-risk investments. Flashy marketing campaigns - often through social media - from providers promising eye-watering rates of return cannot be left ignored. The elephant in the room is what these proposals mean for bitcoin and other cryptoassets which has risen to prominence in recent history, which the City watchdog already has in its sights.”