Post-Brexit FCA: More regulation coming right up!

The Financial Conduct Authority (FCA) has published proposals to strengthen its financial promotion rules for high-risk investments to help retail investors make more effective decisions.

The discussion paper (DP) seeks views on 3 areas where changes could be made to address harm to consumers, from the classification of high-risk investments to the segmentation of the high-risk investment market and the responsibilities of firms that approve financial promotions.

The financial watchdog’s focus is to prevent harm in the consumer investment market as there is a growing trend of retail investors choosing to invest in inappropriate high-risk investments that do not meet their savings goals and investment needs, according to the FCA.

This behavior, which can lead to significant and unexpected investment losses, can be observed in recent research. A report found that over 4 in 10 (45%) did not view ‘losing some money’ as a potential risk of investing.

The discussion paper questions whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply, for example for equity shares and Peer-to-Peer agreements.

The FCA also proposes further segmenting the high-risk investments market to prevent consumers from investing in “inappropriate high-risk investments which do not meet their needs”. The FCA is considering what improvements could be made to risk warnings, which are often perceived as white noise to many investors and often do not convey the genuine possibility of an investment loss.

Other suggestions in the paper include requiring consumers to watch educational videos or to pass an online test to demonstrate sufficient knowledge about financial products. This could help prevent consumers from simply clicking through and accessing high-risk investments that they do not understand.

The FCA is also seeking views on whether there should be more requirements for firms that approve financial promotions for unauthorized persons, to ensure it remains clear, fair, and not misleading.

Sheldon Mills, Executive Director, Consumers and Competition at the FCA said: “We have been clear that we want to deliver a consumer investment market that works well for the millions of people who stand to benefit from it. We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses.

“We have already taken action by banning the mass-marketing of speculative mini-bonds. We continue to address harm in this market through our ongoing supervisory and enforcement action but recognize more needs to be done. Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don’t meet their needs.”

The FCA is inviting feedback on its discussion paper by 1 July 2021. The new regulation will apply to:
consumers and consumer organizations;
authorised firms which approve financial promotions for unauthorised persons (section 21 approvers), whether for high-risk investments or otherwise;
issuers of non-mainstream pooled investments, speculative illiquid securities and non-readily realisable securities;
investment-based crowdfunding (IBCF) platforms and other intermediaries distributing investments to consumers;
peer-to-peer (P2P) platforms;
trade bodies for the IBCF and P2P sectors;
issuers of listed or exchange-traded securities, and trade bodies for these issuers;
investment companies, and trade bodies for this sector;
issuers of other types of investments;
firms operating in the cryptoassets market;
financial advisers;

FCA to regulate SPACs

The FCA has recently announced plans to further regulate SPACs, including structural features and enhanced disclosure, such as a minimum market capitalization and a redemption option for investors.

SPACs have become the new trend in buyouts. UK’s chancellor, Rishi Sunak, has recently jumped on the bandwagon and commissioned a review of the London Stock Exchange rules. The government review led by former EU commissioner Jonathan Hill has made the loosening of restrictions on SPACs a priority.

The review suggested removing a requirement for trading in SPAC shares to be suspended during a takeover so investors have time to scrutinize the deal.

Crypto CFDs for retail investors banned since March 2021 in the UK

The UK financial watchdog has also recently banned crypto CFD products for retail clients as it considers these products to be ill-suited for retail consumers due to the harm they pose.

According to the FCA, crypto CFDs cannot be reliably valued by retail consumers because of the:

inherent nature of the underlying assets, which means they have no reliable basis for valuation
prevalence of market abuse and financial crime in the secondary market (eg cyber theft)
extreme volatility in cryptoasset price movements
inadequate understanding of cryptoassets by retail consumers
lack of legitimate investment need for retail consumers to invest in these products
These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products.

The regulator stated that retail consumers are estimated to save around £53m from the ban on these products. The ban announcement was issued in 6 October 2020 and retail brokers started to enforce the new restriction in 6 January 2021. The total ban took effect in 25 March 2021.

Providing liquidity is no easy function to achieve. It requires a combination of capital, technology, and established institutional relationships for successful delivery.

When it comes to crypto CFDs, it means bringing an emergent asset class to the world of contracts for difference products. The challenge became feasible in 2017 as the crypto ecosystem matured to the point even CME Group launched the first Bitcoin futures contract.

FinanceFeeds spoke to Natalia Zakharova, Head of Business Development at FXOpen, a global company that has regulatory licenses in Australia, in the UK, and European jurisdictions, to ascertain her view on the challenges of crypto CFD liquidity aggregation and delivery.

“If we speak about crypto CFDs, I don’t see why liquidity aggregation should be any different than forex. It might have been an issue back in 2017 when crypto CFDs were new, liquidity was thin and demand was huge. These days there is a choice of reputable LPs offering consistent pricing and execution.

“Deliverable crypto is a different matter. When crypto exchanges start being regulated and offering reliable connectivity, brokers still have to make sure that their aggregation software is able to handle cryptos and their infrastructure can ensure timely delivery. Moreover, counterparty risk remains much higher than with a regular forex LP”, said Ms. Zakharova.

Indeed, a number of established prime brokers have launched their crypto CFD offerings, including CMC Markets Connect, Advanced Markets, and B2Broker.