The Financial Conduct Authority (FCA ) has published a discussion paper regarding financial information provided for retail investors. The British regulatory body wants to make them more helpful and transparent to better fight potential investment risks.
Currently, the standards for the information are included in rules known as the Packaged Retail Investments and Insurance Products (PRIIPs) framework and the Undertaking of Collective Investment in Transferable Securities regulations. These were created when the UK was still part of the European Union (EU). Now, the FCA is responsible for drafting new rules.
The new framework should be tailored to the conditions and needs of the local investment market, allowing retail investors to make fully informed decisions. It includes providing clear and easily accessible information on costs, commissions and potential risks.
As part of the discussion paper, the FCA wants to know the industry's different approaches to providing information to consumers. In addition, the regulator is considering who will be responsible for preparing disclosures.
The FCA believes that beyond the information itself, the way it is presented is fundamental. The more interactive form should encourage investors to read in detail about the risks and costs incurred.
"The current rules make it very difficult for consumers to get the information they need in the way they need it to help them make effective investment decisions. We now have the flexibility to design a new regime which is less rigid and more focused on the outcome we are seeking – we want consumers to have the confidence to invest and understand the levels of risk involved," Sarah Pritchard, the Executive Director of Markets at the FCA, said.
The regulator is waiting for comments and proposals until 7 March 2023. Since Brexit , the FCA has made some changes to PRIIPs to address the most important areas of risk better. However, until the new requirements officially come into force, firms must continue to comply with PRIIPs and UCTiS.
First, Do No Harm
A number of actions carried out by the FCA since the outbreak of the Covid-19 pandemic in 2022 clearly showed that the institution wants to reduce the potential retail investors' risks and consequential losses.
Guided by the Latin phrase "First, Do No Harm," FCA encourages investment firms operating in the local market to change their approach to advertising and distributing investment products and even the very design of their mobile apps.
The UK's FCA actions intensified in the second half of 2022. In August, the institution introduced new guidelines for promoting high-risk investment. Companies must clarify the risk of investing in a 'risky instrument' and cannot offer referrals and other incentives.
Moreover, the regulator's updated rules applied to advertisements and promotions offered by investment firms. This continued with December's presentation of a new framework for companies accepting financial promotions to identify better and exclude rogue campaigns.
According to the FCA, social media and trading apps have pushed individual traders to make less informed decisions. The effect of 'gamification' may lead to overtrading and excessive risk-taking. The market watchdog asked trading app operators to reevaluate their design to fight the growing problem.
On top of that, the institution addressed a warning directly to providers of contracts for difference (CFDs) products. In early December, the FCA screened out 'poor practices' and issued a 'Dear CEO' letter to industry representatives in the UK. Due to inappropriate actions, the regulator halted the operations of 24 firms in two years and protected consumers from losing £100 million.
The FCA wants more precise risk information, less intrusive advertising, better-designed mobile apps and investment products tailored to retail investor risk profiles to reduce overall investment losses. In the CFD market alone, they are stuck at the 80% level.
