The FCA has finalised stronger rules to help tackle misleading adverts that encourage investing in high-risk products.
Under the stronger rules, firms approving and issuing marketing must have appropriate expertise, and firms marketing some types of high-risk investments will need to conduct better checks to ensure consumers and their investments are well matched.
This follows concerns that a significant number of people who invest in high-risk products do not view losing money as a risk of investing and invest without understanding the risks involved.
These new rules build upon the FCA’s more assertive and interventionist approach to tackling poor financial promotions, reducing the potential for unexpected consumer losses.
Weirdly, the new rules will not apply to cryptoasset promotions. However, once the Government and Parliament confirms in legislation how crypto marketing will be brought into the FCA’s remit, the FCA will publish final rules on the promotion of qualifying cryptoassets. These rules are likely to follow the same approach as those for other high-risk investments. Crypto remains high risk so people need to be prepared to lose all their money if they choose to invest in cryptoassets.
Consumers need to accept responsibility for their decisions and actions and not be so quick to blame others or expect compensation when things do not go to plan
The definition of “high risk” is subjective. Personally, I think that cryptoassets represent “off the scale” high risk. They appear to be given values that do not make any sense. There is no underlying asset to value. However, it may just be that I do not understand how they work. This ties in very nicely with the Consumer Duty of advisers ensuring that clients understand the solution that has been offered to maximise the potential of the client getting a “good outcome”.
This Consumer Duty issue comes into the judgement of any arrangement made for a client. Most traditional high-risk products or arrangements can be suitable for clients, if they enable the clients to achieve their objectives and are explained correctly.
Conversely, even the most straightforward and simple products can be seen to cause harm if set up incorrectly or if they are not suitable for the clients.
Consumers need to accept responsibility for their decisions and actions and not be so quick to blame others or expect compensation when things do not go to plan. This unwillingness to accept responsibility causes providers to be overly cautious and write disclaimers that nobody will ever read. How often do we happy a garbled disclaimer read out so quickly to fill an advertising time? Or McDonalds protecting themselves against claims by putting “this cup may contain hot liquid” on coffee and teacups. Really?
The FCA has also launched a consultation which could see Long Term Asset Funds (LTAFs) marketed to a wider group of retail investors and schemes in future.
The proposals out for consideration would provide access to non‑traditional investments, which consumers might use to diversify their portfolio and for potentially higher returns, while still offering strong consumer protection.
In 2011, I worked with a firm that had set up a fund based on traded policies. The fund bought US whole of life policies from older people. The fund would pay the premiums and then claim the proceeds on the death of the policyholder. This provided a value for the policyholder who would otherwise have simply let the policy lapse. The fund would profit if the calculations were done correctly at the time of purchase.
- Death benefit US$ 100,000
- Expected term of policy – purchase to death – 10 years
- Monthly premium – $100
- Total premiums over 10 years – $12,000
- Profit for fund built in $25,000.
- Total cost of running policy $37,000
- Purchase price $63,000
The price would be set after underwriting to ascertain health and life expectancy. The profit would cover for possible error in the original underwriting against the actual term of the policy.
This fund would get stronger as it matured and the proceeds would come into the fund with more continuity as time went on.
Due to the illiquid nature of the underlying investments, the fund allowed withdrawals and income payment on a monthly dealing date.
This fund was classed as an Unregulated Collective Investment Scheme. As such, it was considered in the same category as funds based on Brazilian rainforests, storage units and other “innovative and unusual asset classes”. The whole of the UCIS fund sphere is denounced by the FCA as being “toxic”. This led to many people wanting to withdraw their investments, which led to the funds quickly becoming illiquid or going bust, so that they became “toxic”.
I have often wondered why the FCA seems to make exceptions to regulation – buy-to-let mortgages, cryptoassets, Non-Mainstream Pooled Investments (re-badging of UCIS). What advisers would actually want would be a kitemark system of investment and products that they can market and those that they cannot.
The FCA has refused to kitemark as it feels that consumers would see a kitemark as a guarantee of safety and suitability. The kitemark could simply run with risk warnings or simply to advise that products should not be bought without first having taken advice.
The wider marketing of Long-Term Asset Funds (LTAF) should be welcomed as this will enable diversification for consumers into physical property, life policies or any other funds that are based on illiquid assets. This could actually lead to a lowering of the risk levels of investment portfolios in the future. The Consumer Duty should ensure that advisers make clients aware of the illiquid nature of the funds and the possible effect on future withdrawals.