The FCA has warned that ‘high risk’ investment products are exposing consumers to “more risk than they can absorb.”

Some high risk investment products, such as some mini-bonds, are being marketed to investors who have little understanding of the risk involved, it says.

Because few people take advice before investing in these products the FCA says it is looking at encouraging ‘one-off transactional advice’ from advisers as a potential gap in the market. It will report back in the autumn.

The FCA is to investigate the growth of unregulated or only semi-regulated 'high risk' investment products. 

The regulator said: “High-risk retail investment products are exposing consumers to more risk than they can absorb.

“Some of the highest risk products are often marketed directly to retail consumers with poor communication of the risks involved and implications that the investments are regulated, when this is not the case.”

The regulator sounds the warning about high risk investments and other areas, including the quality of DB transfer advice, in its 86-page Sector Views report published today. The report is a yearly assessment of the “risks and potential harm” consumers face across financial services.

On investment, the report does not specifically refer to the £236m London Capital & Finance mini-bond debacle but does say: “The sale of unsuitable or fraudulent high-risk products is the most significant harm in this sector (retail investment).

“Over time, risky investments have been directly targeted at consumers, leaving them more directly exposed to risk.

“To tackle a key part of this harm, we have recently issued a temporary product intervention on the marketing of speculative mini-bonds to most retail customers. Key drivers of this harm have included the complexity of products, meaning consumers may not understand the risks they are taking.

“These risks are much greater for investments that offer high returns compared to more mainstream products.

The FCA estimates that at the end of 2018, 1.2% of British adults held retail or mini-bonds “many with little regulatory protection.”

Christopher Woolard, interim FCA chief executive designate, said: “What is clearly apparent from the Sector Views, is that many of the harms we are seeing are created by a significant number of smaller firms we regulate or firms beyond our remit.  

“The findings in the report will contribute to our upcoming Business Plan and the decisions we make affecting consumers, market integrity and competition.”

In the Pensions and Retirement sector the report says issues and potential harms to consumers include unsuitable advice, the sale of unsuitable products, poor value and pension scams.

The FCA has also repeated concerns about the quality of DB pension transfer advice and also potential harm when consumers invest in pension product wrappers, such as Self-Invested Personal Pensions (SIPPs), that are “overly complex and include fees for services they are unlikely to need.”

The FCA report says that "unsuitable transfers" out of DB schemes could collectively result in losses of up to £20bn worth of guarantees over 5 years and consumers making unsuitable product choices in retirement could also lose £20bn from unsuitable investment strategies over 5 years.

On platforms the FCA says competition is working well but “charges may be unclear.” It says 19% of platform consumers do not know whether they pay charges for investing via a platform, while 10% think they do not pay anything.

Paul Dyer, head of regulatory risk and assurance at Huntswood and former deputy chief risk officer at the FCA, said: “Given the considerable criticism that the regulator has faced in recent times for a slow reaction to known market issues, including Carillion, Woodford and mini-bonds, firms should expect considerable scrutiny in these areas.”

The FCA Sector Views report can be accessed here: Sector Views 2020