Earlier this week, the Financial Conduct Authority (FCA) set out its “view of consumer harm” in the investment market and a three-year strategy to address it. The main aim of the plan is to encourage more people to invest in sensible investments while avoiding scams, which sounds laudable. The FCA has set several targets with regard to meeting these goals, which could help to implement changes but must be treated with care.
According to the regulator’s analysis, 37 per cent of investors in the UK with over £10,000 of investable assets have it all sitting in cash, and a further 18 per cent have it mostly in cash. In response, the FCA has set a target of reducing by 20 per cent the number of ‘higher risk tolerance’ consumers who hold over £10,000 in cash by 2025.
£10,000 seems quite low considering that financial advisers generally do not recommend you put money in the stock market if you think you might need to use it in the next five years and suggest keeping six months' worth of your expenditure in cash. Perhaps ‘higher risk tolerance’ adjusts for these facts, but it isn’t clear.
The cynical side of me thinks that the government wants to channel more investment and the opportunity to get private investors to do this has been getting stronger with the rise in the savings rate and a downtrend in fees. However, it’s also right that more people need to invest – especially given the decline of defined-benefit pension schemes and increasing life expectancy.
The FCA’s second action point relates to its concern about investors unwittingly taking too much risk. Its research shows that 6 per cent of UK adults have invested in high-risk investments for the first time or increased their stakes during the pandemic – despite almost half of these people thinking that they can’t lose money on investments. As Laura Suter, head of personal finance at investment platform AJ Bell, put it: “Clearly there is a big mismatch here between expectations and reality.”
A rush of investors, or should we say speculators, into cryptocurrencies and GameStop – particularly young ones – has spooked the regulator. But plenty of funds are also considered to be ‘high risk’ by many, so it will be interesting to see what further detail the FCA produces. Higher-risk equity funds are probably the best place for young people’s pension savings – despite the fragility of the global economy.
There has been a proliferation of online investment scams. But aside from alerting people to the risks, there’s little the financial regulator can do about this. The government has made some progress by introducing legislation in the online harms bill on fines for social media companies whose users promote fake investments, but not all scams will fall under the scope of the new bill. For example, fraud carried out via cloned websites, fake advertising and email scams are excluded. But hopefully it won’t be long before this is revisited.
Financial literacy and education is the key to all of this, and it’s great that the regulator is focused on encouraging firms to make investing more accessible with straightforward products and clear guidance. But it needs to be careful not to leave room for misinterpretation along the way.