With individual investors now exposed to direct marketing of some products, the UK financial regulator has spelled out which parts of the personal investment market it is most worried about.
“Sustained low interest rates have suppressed returns in safer asset classes, resulting in many consumers deciding to take on more risk in the search for yield. It has led to some being tempted by promised returns from high risk, and sometimes fraudulent, investments.”
So says the Financial Conduct Authority (FCA) in its document ‘Sector Views: Key areas of harm identified’, published mid-February. What the FCA is describing in formal terms is how private investors looking for an income from their capital are being forced to look beyond deposit accounts and opening themselves up to more risk in doing so. The extent of that additional risk is not always evident to investors who haven’t sought professional advice, as has been evident in the fall out from London Capital & Finance (LC&F).
LC&F promoted ‘mini-bonds’, which themselves are not directly regulated by the FCA. In the wake of LC&F’s demise in December 2018 amid investor losses, the FCA introduced new rules to prevent the mass-marketing of such products to the general public. However, the ban did not come into effect until the start of 2020 and is only for 12 months while the FCA consults on permanent rules. According to the FCA, by the end of 2018, “1.2% of British adults held retail or mini-bonds – many with little regulatory protection.”
The regulator recognises that “…risky investments have been directly targeted at consumers, leaving them more directly exposed to risk”. The direct approach means that the ‘consumer’ is not offered any regulated advice and will not receive any unless they talk to a financial adviser. Without advice, the adage that ‘if it looks too good to be true, it probably is’ does not seem as be as effective as it once was. That is probably another consequence of ultra-low interest rates. If you find yourself considering an investment that offers higher returns than normal, especially if it is being directly promoted, remember that adage. Then, if you are still tempted, make sure to take independent advice before acting (not the other way around).