FCA Warns New, Younger Investors About Big Market Risks

Research published by the Financial Conduct Authority (FCA) reveals a younger, more diverse group of consumers are getting involved in higher risk investments like cryptocurrencies and foreign exchange.

These higher risk products are showing they may not be suitable for inexperienced investors as nearly 59%, nearly two thirds, claim significant losses and these losses would have a fundamental impact on their current or future lifestyle.

The FCA found that younger investors enjoy the thrill of investing and the status of ownership from the companies they invest in were the key reasons behind their decisions to invest.

Those investing in high-risk products said: “The challenge, novelty and competition where more important than functional and conventional reasons for investing such as making their money work harder or saving for their retirement”.

• 38% of those surveyed did not list a functional reason for investing in their top 3 sectors.

Executive Director, Consumer and Competition at the FCA said: “They are worried investors are being tempted through high-pressure sales tactics or online adverts and investing in higher-risk products that are unsuitable for them”.

“Through are investment harm campaign, the research will help us understand the motivation of consumers and tell them the risks involved, we want to make sure we encourage especially the younger generation the ability to invest and save for their future. Investors need to be aware of their risks when investing and only invest money they can afford to lose in high-risk products”.

Research shows investors do have high confidence and knowledge, but also their lack of awareness and belief in the risks of investing.  Over 4 in 10 said: “losing some money was not one of the main risks of investing even though most of their capital was at risk”.

78% (almost 4 in 5) agreed they trusted their instincts when to buy and sell and 78% also agreed that certain investment types, sectors or companies they considered are 'a safe bet'.

Research also saw younger investors may have the lowest level of financial resilience or tolerance to losses which, would make them more vulnerable to investment loss.  59% of self-directed investors with 3 years or less experience could see significant losses owning high risk investment products compared with 38% of investors with more than 3 years’ experience.

The FCA is making it a priority to tackle harm in the consumer investment market and has commissioned BritainThinks to conduct in-depth research into the behaviours, attitudes and financial resilience.  The research will help the FCA design a new campaign in addressing the harm caused by consumers investing in high risk, high return investments that may be unsuitable for their needs.

The FCA has also today launched its digital disruption campaign to prevent such investment harm.  Online advertising will be used to disrupt investors and will cover key questions consumers should ask before investing.

5 points the FCA suggest inexperienced consumers should consider before investing:

• Am I comfortable with the level of risk?
• Am I protected should things go wrong?
• Do I fully understand the investment being offered to me?
• Should I get financial advice?
• Are my investments regulated?

Papers on tackling consumer harm in the investment market have recently been published by the FCA which include banning the mass-marketing of speculative mini-bonds and further plans will be set out later this year. 

Also published is a warning to consumers on the dangers of investments advertising high returns based on cryptoassets.

Comment

Most people learn by their mistakes, even when we were all falling down as babies trying to learn to walk.  The FCA will do its best to protect younger investors but experience will be the real education.