FCA sees unsuitable and low-quality products as main concern for retail investment sector

Maria Nikolova

Conflicts of interest, poor treatment of clients, a lack of comparability across products and sometimes misleading or confusing communications continue to plague the retail investment sector.

The UK Financial Conduct Authority (FCA) has earlier today published its latest Sector Views. The document provides the FCA annual analysis of the changing financial landscape, the resulting impacts on consumers and market effectiveness. The assessment will feed into the FCA Business Plan 2019/20.

The Sector Views are based on the data available and the FCA views at mid-2018. Each Sector View helps the FCA determine where to focus its efforts and its operational plans.

The retail investment sector covers the distribution of investment products to consumers through a variety of different channels: financial advisers, wealth managers, and platforms. It also covers some specific retail investment products.

The main concerns in this sector continue to be unsuitable products and services, high charges, and low quality products and services, the FCA says.

These have the potential to occur across the different distribution channels and within the various investment products covered in this sector, especially the more complex products. They are driven by some consumers’ limited financial knowledge and engagement and firm-specific behaviors. These, in turn, lead to conflicts of interest, poor treatment of clients, a lack of comparability across products and sometimes misleading or confusing communications.

A lack of robust and up-to-date processes to protect against cyber and financial crime and technological disruption is another driver of problems.

High risk cryptoassets, which are outside the FCA’s remit, have recently attracted considerable attention, the regulator notes. The FCA’s remit covers the sale of cryptocurrency derivatives, such as futures, CFDs or within an authorised fund, but not cryptoassets themselves. Consumers do not always understand what falls under our regulatory remit. As a result they may not realise that they may not be covered by any financial compensation scheme if they suffer loss.

Let’s note that the FCA is planning to consult on a ban on cryptoasset derivatives. FCA will consult on a prohibition of the sale to retail consumers of all derivatives referencing exchange tokens such as Bitcoin, including CFDs, futures, options and transferable securities. The proposed prohibition would not cover derivatives referencing cryptoassets that qualify as securities, however CFDs on securities would remain subject to ESMA’s temporary restrictions and any future FCA proposals to implement permanent measures in relation to CFDs.

The FCA notes that there are a lot of factors driving change in the retail investments sector. There are three main ones:

  • the low interest rate environment and its effect on investment returns;
  • regulatory scrutiny and policy changes;
  • technological developments resulting in changes and innovation in investment product design and the channels by which consumers access investments.

Retail investments have grown across all distribution channels and in most product categories. However, retail investments are not widely held among UK adults. The FCA’s Financial Lives Survey showed that, excluding pensions, only a third (33%) of the UK population hold any form of investment product, regulated or unregulated. Stocks and shares ISAs are the most popular retail investment product and continue to grow, albeit slowly.

Although the Sector Views are not a consultation, the FCA is interested in the views of its stakeholders on the findings. Comments should be send to [email protected].

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