On 23 March, the FCA published an update on its research findings into investors who engage in "high-risk investments like cryptocurrencies and foreign exchange", focussing particularly on younger, more diverse consumer involvement owing in part to the increased access offered by new investment apps:
"Research findings indicate that this newer audience has a more diverse set of characteristics than traditional investors. They tend to skew more towards being female, under 40 and from a BAME background. This newer group of self-investors are more reliant on contemporary media (e.g. YouTube, social media) for tips and news […]"
Key points of interest within the update include:
1. That for many investors, "emotions and feelings such as enjoying the thrill of investing, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest";
2. For those investing in high-risk products, factors such as "challenge, competition and novelty" were more important than conventional investing rationale, such as saving for retirement; and
3. Amongst those surveyed, there was a lack of awareness or perhaps belief in the risks associated with investing, "with over 4 in 10 not viewing ‘losing some money’ as one of the risks of investing, even though as with most investments their whole capital is at risk" and widespread reliance on gut instinct and intuition - with 78% agreeing “I trust my instincts to tell me when it’s time to buy and to sell”.
Tackling harm in the consumer investment market is a key priority for the FCA as outlined in its Business Plan 2020/21, with recent actions including its Call for Input on the consumer investment market, the ban on the mass-marketing of speculative mini-bonds and warnings to consumers around the dangers of investments "advertising high returns based on cryptoassets".
As such, the FCA advises consumers to consider "five important questions" prior to investing:
- "Am I comfortable with the level of risk?"
- "Do I fully understand the investment being offered to me?"
- "Am I protected if things go wrong?"
- "Are my investments regulated?"
- "Should I get financial advice?"
The research will also help in designing a new campaign "to address the harm caused from consumers investing in high risk, high return, illiquid investments that may not be suitable for their needs".
These younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss. Research showed that a significant loss could have a fundamental lifestyle impact on 59% of self-directed investors with less than 3 years' experience, who are more likely to own high risk investment products, compared with 38% of investors with greater than 3 years’ experience.