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May 4, 2021

FCA crackdown on high-risk investments and end of ‘self-certification’ for retail investors

By Zoya Malik

 

The FCA has signalled a further crackdown on high-risk investment and the potential end of ‘self-certification’ for retail investors seeking to invest in risky products, says accountancy and business advisory firm BDO LLP.

In a discussion paper published in April, the regulator has asked consumers and financial services firms what investments should be included in the group of products it treats as ‘high risk’ and face heavy restrictions on their promotion. The FCA last year added ‘mini-bonds’ to this group, banning firms from marketing them to retail investors.

BDO says that products such as P2P lending, crowdfunding and crypto-assets could now come under closer scrutiny and potentially face greater restrictions on who they can be marketed to.

The FCA has also signalled that it is considering ending the current system under which investors can ‘self-certify’ as being sophisticated investors, giving them access to much riskier investments.

In the discussion paper, the FCA asks whether the current system, which is often treated as a simple ‘tick-box’ process by firms, is fit for purpose. In light of recent failures of high-risk investment providers, two independent reviews found the self-certification system allowed many unsophisticated retail investors to invest in unsuitable high-risk products.

Matt Hopkins, Head of Digital Banking & Fintech at BDO, comments: “This is a clear signal that the FCA is aiming to bring high-risk investment to an end for retail investors.”

“P2P platforms have already seen restrictions placed on how they market their products, and today’s paper is a sign that further regulation may be coming.”

“The FCA has suggested that it might introduce a requirement for more verification of investors by firms, such as asking them to prove how much money they have to invest, or to provide documents showing they are genuinely sophisticated.”

“The FCA has accepted self-certification of investors isn’t fit for purpose. Just as affordability checks led to the effective demise of the UK payday lending industry, a similar system for sophisticated investors will impact the availability and shape of riskier investment products.”

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