Britain's investment loophole has gone on long enough
If an investment is considered unsuitable for the overwhelming majority of ordinary consumers, the rules governing who can access it need to be robust enough to actually protect them, writes Dean Dunham KC.
Imagine a financial product is considered so risky that the regulator says it should not normally be marketed to ordinary consumers. You’d assume that was the end of the matter, but apparently not.
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The Financial Conduct Authority (FCA) has issued a fresh warning about unregulated loan notes and mini-bonds after continuing to see consumers lose money in these high-risk investments. The recent collapse of Woodville Consultants is one example cited by the regulator.
The FCA banned the mass marketing of speculative mini-bonds and loan notes to ordinary retail investors from 2021. Yet consumers can still encounter them through social media adverts, websites and introducers promising attractive fixed returns.
And here’s the part that should concern us. The FCA says it is seeing consumers encouraged to certify themselves as experienced or wealthy investors so these investments can be promoted to them.
In other words, protections designed to stop ordinary consumers being exposed to exceptionally risky investments can potentially be circumvented by persuading someone that they are sufficiently sophisticated to understand the risks.
That’s not consumer protection, it’s a loophole.
I’m all for personal responsibility. If someone invests their savings without asking questions, particularly when unusually high returns are promised, they have to accept some responsibility for that decision.
But there’s a huge difference between making an informed investment decision and being persuaded by a slick salesperson or online advert that ticking a box suddenly makes you a sophisticated investor. It clearly doesn’t and the consequences can be devastating.
With unregulated investments, consumers may have little or no protection if things go wrong. They may not be able to complain to the Financial Ombudsman Service or claim through the Financial Services Compensation Scheme.
The FCA itself says big fixed returns should be treated as a warning sign rather than a guarantee, so it’s time we went further.
If an investment is considered unsuitable for the overwhelming majority of ordinary consumers, the rules governing who can access it need to be robust enough to actually protect them.
We wouldn’t allow somebody to tick a box declaring themselves a qualified electrician before rewiring their house.
So why, when someone’s life savings could be at stake, are we comfortable with anything resembling the same principle?
A tick-box doesn’t make somebody sophisticated and it certainly won’t bring their money back when it’s gone.
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Dean Dunham KC presents LBC's Consumer Hour every Sunday from 9pm-10pm.
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