New rules to clamp down on adverts promoting high-risk investments

Tougher rules to tackle misleading adverts encouraging high-risk investments have been brought in by the financial regulator.

The new rules ban investment companies from offering certain incentives to invest, such as “refer a friend bonuses”.

The Financial Conduct Authority (FCA) said the clampdown on advertising follows concerns that a significant number of people investing in high-risk products do not understand that losing money is a risk of investing.

Consumers often cannot tell the difference between different types of investments and tend to focus on promised returns which, if they are significantly above 1% a year, could appear better than they are in reality, the FCA found.

The regulator also warned that investment decisions are highly influenced by emotional and social factors such as gut instinct, irrational energy and how they perceive other people’s investment success.

Under the new rules, investment firms will need to use clearer risk warnings and conduct better checks to ensure consumers are well matched to their investments.

More than 4,000 adverts were amended or withdrawn after intervention from the FCA in the year to the end of July.

Sarah Pritchard, executive director of markets at the FCA, said: “We want people to be able to invest with confidence, understand the risks involved, and get the investments that are right for them which reflect their appetite for risk.

“Our new simplified risk warnings are designed to help consumers better understand the risks, albeit firms have a significant role to play too.

“Where we see products being marketed that don’t contain the right risk warnings or are unclear, unfair or misleading, we will act.

“This is even more important now because increases in the cost of living could prompt people to chase higher investment returns which may prove risky.”

Trading apps have grown rapidly, driven by a surge in investments in Gamestop and other “meme stocks”, the FCA added.

But the ease of app and mobile investing means consumers can more easily make bad decisions or invest without advice and support, it warned.

Investors are also more likely to see high-risk investment products being advertised through social media platforms like Facebook, Instagram and TikTok.

Investment companies welcomed the FCA’s rules but warned uninformed or novice investors could still fall into unsuitable investments.

“The boom in first-time investors we saw in the pandemic means there has also been a surge in novice investors putting their money in high-risk assets without realising the risk they are taking on”, Laura Suter, head of personal finance at AJ Bell, said.

“The FCA is aiming to stop newcomer investors sleepwalking into unsuitable, high risk investments.

“The move will mean that investors can’t just buy things like mini-bonds, peer-to-peer and certain crowdfunding with a few clicks of the mouse.

“However, even with the rule changes announced today, the regulator won’t be able to stop every uninformed or vulnerable customer from going into unsuitable investments.

“Instead, in the next three years, the FCA is aiming is to halve the number of people investing in high-risk assets who have a low risk tolerance or who are vulnerable – which means taking more than 1.5 million out of harm’s way.”

The FCA said it has taken steps to stamp down on poor financial promotions that could lead to consumers losing money unexpectedly.

It has also pursuing separate rules relating to crypto marketing, depending on legislation being drawn up by the Government that will clamp down on the promotion of typically high-risk cryptocurrency investments.