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FCA research backs overhaul of ‘capital at risk’ warnings

The days of the “your capital is at risk” investment label may be numbered, as research from the Financial Conduct Authority backs an overhaul of its warning system.

The standard small-print risk alert is perceived as “white noise” by consumers and fails to illustrate potential losses, according to research from the regulator. The FCA has commissioned behavioural studies to explore the creation of new warnings “relevant to other high-risk investments, such as crowdfunding and crypto assets”.

This comes with the regulator drafting a wider plan to strengthen its rules on promoting high-risk investments, including crypto. The Treasury last month announced that crypto assets promotion will fall under the financial watchdog’s remit.

Many retail investors increased their allocation to high-risk investments during the pandemic, driven by low interest rates and social media promotion. “This is particularly worrying as it came at a time of increased consumer vulnerability and if they had invested in crypto, they would have seen the value of their holdings plunge dramatically in the last few months,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The FCA’s research, which informs its wider policy proposals, found that the use of louder risk warnings with bold text and a red background was more effective than the current standard risk warnings. The aim is to “interrupt automatic behaviours” in a consumer’s journey, putting them in “a more deliberative frame, giving them time to pause, read and reflect,” said the researchers.

A survey they conducted found that 45 per cent of new self-directed investors were unaware that losing some money was a potential risk. Bolder warnings could tackle “the harm from consumers investing in high-risk investments that do not match their risk tolerance”. The labels could include links directing investors to further information, as well as frequently asked questions and tick box surveys asking consumers to confirm that they have understood the risks.

“Disclosures cannot only help people understand financial products, but also draw attention to neglected considerations like risk, perhaps deterring some consumers from buying products that are unsuitable for them,” said the research team.

Another area which the researchers are looking at changing is self-certification, through which consumers certify that they are either wealthy or experienced enough to access high-risk investments. According to the FCA: “Too many customers do not understand” it or “may just be clicking through without properly considering whether the investment met their needs”.

The research proposes various behavioural nudges to halt potential investors, such as asking them to provide evidence that they are a wealthy or experienced investor, or adding a time delay before approving it.

“Assuming these proposals are brought in, they will significantly sharpen decision making and shift investing behaviour, so many more consumers take a deep breath before jumping into high- risk deep waters, and only paddle in at the edge of their portfolios,” said Streeter.

The financial watchdog previously attempted to tackle vulnerability to high-risk investments by banning the mass-marketing of speculative illiquid securities, such as speculative mini bonds, to retail investors. It also launched a “don’t get played” campaign, targeting the young investors most vulnerable to investing in crypto without understanding the associated risks.

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