Consumer Investments Strategy – 1 year update

Outcome 

20% reduction in number of consumers with higher risk tolerance holding over £10k entirely or over 75% in cash by 2025.

Update on the Strategy workstreams  

In our Consumer Investments Strategy, we committed to deliver the Consumer Duty, make it easier for firms to support consumers to invest in straightforward products and to improve consumer pension outcomes.

Improving consumer investment outcomes: In July, we published final rules[11] for the new Consumer Duty alongside guidance[12] to support firms to implement it. The Duty consists of a new Principle 12 of the FCA Principles for Businesses (a firm must act to deliver good outcomes for retail customers), supported by cross-cutting rules and rules on the 4 outcomes we want to see.

The Consumer Duty will help enable good consumer investment outcomes in several ways. This includes improving firms’ focus on appropriate target markets and providing support that meets their customers’ needs. Firms have until 31 July 2023 to comply with the Duty for new and existing products and services. They have until 31 July 2024 to comply for products and services which are no longer open to new customers (or for renewal). We will communicate with consumer investment firms later this year to set out our expectations.  

Giving consumers the confidence to invest: We will consult in 2022 on new rules and guidance for when firms provide advice to retail clients when investing new money into stocks and shares ISAs. This will set out a more proportionate regulatory regime for this advice area, providing greater clarity on firms’ suitability obligations, flexibility on how firms charge for their services and amended staff training and competence requirements. Our aim is to make it more cost-effective for firms to develop advisory services for consumers who might benefit from investing, while retaining appropriate consumer safeguards and limiting exposure to higher risk investments within an ISA using core ISA advice. We have also announced[13] our intention to conduct a wider review of the advice/guidance framework.

We have also continued to provide support to firms looking to launch innovative products and services through our Innovation Pathways and Regulatory Sandbox[14]. In 2021 these included firms seeking to filter consumers into funds matching their risk profiles and those providing robo-advice. 

Improving consumer pensions outcomes: Our Stronger Nudge rules[15] came into force in June. They require pension providers to refer consumers to Pension Wise guidance, explain the purpose of this guidance and offer to book the consumer an appointment. We published feedback to our Call for Input[16] on engaging consumers throughout their pensions journey. Building on this work and our close working relationship with the Pensions Regulator (TPR), we will publish an update to our 2018 joint regulatory strategy later this year outlining our joint work to improve pension outcomes.

Update on the outcome

Table 3: Outcome metrics

Among consumers with £10,000 or more of investible assets, 58% (9.7m UK adults) held the majority (75%+) or all of this in cash in 2022. Of these over two-fifths (4.2m UK adults) said they had some appetite to take risk when investing.

Accessing the right support is crucial to enabling consumers to make investment decisions. Three-quarters of consumers indicate they would not be comfortable deciding where they invest (72%) or managing their investments (73%) without support from an expert or other guidance.

However, advice is not reaching all parts of the market, with the proportion of the adult population taking advice remaining flat. 8% had taken advice in the previous 12 months in 2022 - the same as in 2020.  

Overall, consumers are still not getting the advice or support they need to invest with confidence and some who have an appetite to invest long-term are failing to consider the opportunities from investing. The cost-of-living crisis and investment volatility may weigh on consumers ability and appetite to invest in 2023. High inflation will also reduce the value of savings held as cash.

Outcome

Reduce the number of consumers investing in HRIs who indicate a low risk tolerance or demonstrate one or more characteristics of vulnerability by 50% by 2025.

Update on the Strategy workstreams  

In our Consumer Investments Strategy, we committed to strengthen the financial promotion regime, launch our InvestSmart communications campaign and continue to use our regulatory toolkit to protect consumers from harm.  

Strengthening the financial promotions regime: We published new rules in August 2022 to strengthen our financial promotion rules for HRIs and firms approving financial promotions[17]. These changes include rationalising the classification of HRIs, introducing friction into the consumer’s journey into HRIs and increasing the requirements on firms who approve financial promotions. The new regime will have full effect from 1st February 2023, with some rules coming into force in December 2022. This policy statement does not cover our proposed rules for cryptoasset promotions. We will make final rules for cryptoasset promotions once the relevant enabling legislation has been made by the Treasury.

InvestSmart advertising campaign: We launched our InvestSmart[18] campaign in October 2021, a 5-year, £11m campaign aimed at helping consumers make better-informed investment decisions. This campaign is targeted at inexperienced investors who are more likely to invest in HRIs, driven by social media and investment hype. We have worked with influencers and advertised to our target audience using social media, search engines and online video placements. Our advertising has driven over 50,000 people to the InvestSmart homepage. 

Deploying our regulatory toolkit: As outlined in our Consumer Investments Data Review 2021/22 we have continued to focus our regulatory resources on acting against firms and individuals who cause consumer harm.

• Preventing harm at the gateway: 1 in 7 new consumer investments firm applications were either withdrawn or rejected because they could not demonstrate they could meet minimum standards on an ongoing basis (this figure has been updated following review).
• Regulatory oversight of the market: We opened 2,215 supervisory cases involving HRIs or potential investment scams in 2021/22, a 116% increase on 2020/21. 649 of these cases related to potentially unregistered cryptoasset business (these figures have been updated following review).   
• Acting against firms and individuals who cause consumer harm: Over 2021/22 we secured £34.8m in consumer redress for unauthorised investment business and published 1,844 consumer alerts about unauthorised firms and individuals. We also took action that led to 39 Voluntary Applications for Imposition of Requirements (VREQs) and imposed 22 Own Initiative Imposition of Requirements (OIREQs), double the amount in 2020/21.
• Providing direct consumer support through our Consumer Helpline: In 2021/22, we received nearly 105,000 enquiries from consumers, with nearly 20% about possible investment scams.  

Update on the outcome

Table 4: Outcome metrics

Ownership of HRIs has grown, with 8% of the adult population now holding cryptoassets, P2P (peer-to-peer) lending, Innovative Finance ISAs and/or investment-based crowdfunding according to our Financial Lives survey (FLS). We measured ownership of CFDs, shares in unlisted companies and mini bonds in 2022 for the first time. When these are included, 5.7m UK adults hold HRIs. Of this 11%, over half (3m UK adults) demonstrated one or more characteristics of vulnerability or had a low appetite for investment risk.

While ownership of HRIs has increased significantly, FLS data indicates many consumers only hold small amounts in HRIs. Among UK adults who held HRIs, 67% held less than 10% of their money in HRIs. HMRC analysis[19] of ownership of cryptoassets also shows us that 53% of owners hold under £1,000.

However, BritainThinks research[20] in 2021 found that nearly 6 in 10 (59%) new (those who have invested for less than three years) non-advised investors who invested in HRIs said a significant investment loss would have a fundamental, negative impact on their current or future lifestyle. Ownership is also higher among younger age groups (16% of 25–34 year-olds hold HRIs vs 11% for the adult population as a whole) and men (16% of men hold HRIs vs 6% of women), indicating risk may be higher among some groups.

Overall, ownership of HRIs has grown both among the general adult population and among consumers who have low risk tolerance and/or demonstrate the characteristics of vulnerability. In the future, cost-of-living pressures may decrease demand for HRIs. On the other hand, declines in mainstream investment markets and income pressures may drive more consumers to seek higher returns through HRIs. We will monitor this, take action where needed and report on these trends again next year, to assess whether this increase in ownership has been sustained.  

Outcome

Slow the growth in investment fraud victims and losses.

Update on the Strategy workstreams  

In our Consumer Investments Strategy, we committed to continue to tackle scams and fraud through our targeted ScamSmart campaigns, our information-sharing and cooperation with external partners and our work to disrupt unauthorised businesses. 

Using our regulatory toolkit: We have continued to act against firms and individuals which are not authorised or exempt under FSMA but who carry on regulated activities. Many firms and individuals carrying on unauthorised activity are likely to be scam firms and involved in some aspect of investment fraud.  

Table 5: Action against unauthorised firms and individuals

ScamSmart consumer campaign: We have continued our ScamSmart[21] campaign, increasing the use of our consumer protection resources by 59% in 2021/22.  As well as helping consumers spot and avoid scams and scam firms, our website Warning List tool[22] also provides intelligence on scam trends to inform our work, eg type of investment offered, method of approach etc.

Table 6: ScamSmart visitors

Tackling scams faster as part of our data strategy: We are using data to tackle online fraud faster[23] by scanning approximately 100,000 websites created every day to identify those that appear to be scams. Where we identify fraudulent websites, we are proactive in asking the website host to shut them down, though we do not have the powers to require this. In 2021/22, we added 1,844 possible scams to our consumer warning list – 40% more than during the same period the previous year. 

Making reducing financial crime a business priority: Given the significant growth in scam and fraud activity, we announced in our 3-year strategy that reducing financial crime would be one of our strategic commitments across all sectors. Stopping financial crime requires a collective effort – from us, regulated firms, Government, law enforcement and our regulatory partners. We will continue to work closely with our partners – in the UK and internationally – to drive a whole-system response to stopping and preventing financial crime. 

Update on the outcome

Table 7: Outcome metrics

*Action Fraud figures were obtained from the City of London Police, and are based on the data reported in the National Fraud Intelligence Bureau (NFIB) Fraud and Cyber Crime Dashboard[24] for the following fraud codes: Pension Liberation Fraud, Fraud Recovery, Share Sales & Boiler Room Fraud, Pyramid or Ponzi Schemes and Other Financial Investment. These figures are based on reports by victims and the losses have not been verified.

All scam indicators are subject to uncertainty and reporting errors. However, the trend is clear - investment scam activity continues to grow significantly with volumes, losses and enquires to our Consumer helpline all rising. This outcome is deteriorating, and it will require a whole-system response to stop this trend.

UK Finance reported a 48% growth in investment scam cases among its members in 2021, with investment scam losses increasing by 57%. Action Fraud reports show a 14% increase in consumers reporting they had been victim of fraud in 2021/22, with reported losses increasing by 47%. 

Reports of possible investment scams to our consumer helpline also grew by 18% in 2021/22 with almost 19,500 calls received, continuing a year-on-year increase. We received over 36,000 enquiries about possible scams in total.

Outcome

Act to stabilise the FSCS Life Distribution & Investment Intermediation (LDII) and Investment Provision (IP) funding classes by 2025 and target a year-on-year reduction in these classes from 2025 to 2030.

Update on the Strategy workstreams  

In our Consumer Investments Strategy, we committed to address the drivers of redress costs, investigate changes to capital requirements for adviser firms, review the compensation regime, address misuse of the Appointed Representatives regime and respond to changes in the PII market.

Addressing the pension issues driving FSCS costs: FSCS compensation costs are primarily driven by 2 key issues – past failings in firms’ due diligence around non-standard assets held in SIPPs and unsuitable Defined Benefit (DB) pension transfer advice.

We have undertaken significant work to clear up these issues. We used emergency powers[25] to prevent financial advice firms, who advised members of the British Steel Pension Scheme (BSPS), from disposing of assets to avoid paying compensation. On SIPPs, we are working with the Financial Ombudsman Service and FSCS to ensure consumers receive redress as quickly as possible.

We are also focused on preventing future harm:

• On DB pensions advice, we are using data to identify high-risk firms and target our supervisory action. We also work with TPR to identify any problems with occupational schemes which might result in customers being advised to transfer out so that we can take action with the relevant advisers (eg our P&O warning)[26].  
• On SIPPs, we continue to use data to identify firms that offer NSIs and assess the due diligence they have conducted on recent business. We take action to restrict their business and retain assets where we find shortcomings.  

Investigating changes to prudential requirements for non-MiFID adviser firms: We have continued our work to review the prudential regime for non-MIFID investment advisers. This work aims to ensure that firms that create redress liabilities are better able to pay them. In doing so we are seeking to promote access to suitable advice and reduce the burden of the FSCS bill on the broader adviser population. We plan to set out further details on this next year, as we explore solutions to the key drivers of harm in the market.

Reviewing the compensation framework: We published a discussion paper in December 2021 on our compensation framework[27] to get views on how to ensure it remains proportionate and appropriate. We plan to publish a Feedback Statement in due course.  

Addressing misuse of the Appointed Representatives (AR) regime: We confirmed new rules and guidance to clarify and strengthen the expectations of authorised firms in relation to their ARs. The changes are intended to improve principals’ oversight of ARs and require principals to provide us with more information on their ARs, allowing us to spot risks more quickly. 

Addressing the hardening of the PII market: We have been undertaking analysis of the PII market. This includes collecting data from PII providers and working with firms to understand the extent to which the PII market is hardening. Any findings will inform our work going forward. We have paused working with firms to better enable them to demonstrate good advice given as a way of reducing their PII premiums while this analysis is underway, to provide a more meaningful response to any issues it identifies.

Update on the outcome

Table 8: Outcome metrics

FSCS costs for investment business declined by 15% in 2021/22 relative to 2020/21. However, the FSCS forecast in its May 2022 outlook[28] that compensation costs will rise by 16% in 2022/23. The reduction in levy costs in 2021/22 was partly because FSCS received fewer claims about self-invested personal pension (SIPP) operators than expected in 2021/22 as FSCS continued to wait on decisions from the Financial Ombudsman Service. Once these decisions are made, FSCS expects this to lead to several SIPP operators’ firms failing. The FSCS also indicated that some claims about pension transfer advice are expected to arise later than expected, with some costs falling to 2023/24.  

SIPPs and other pensions claims contributed 86% of LDII and IP compensation costs in 2021/22, with only £37m of compensation costs for general investment advice in 2021/22. Therefore, our supervisory actions to clear up these issues should help stabilise the redress costs. However, current costs relate to past misconduct, meaning past cases will need to come through the system before redress costs stabilise.

The PII market is also facing challenges. For many policyholders, rates have been increasing, it has become more difficult to renew policies and changes in terms are being introduced. For insurers, claims have been increasing, leading to changing risk appetite for higher-risk activities.

Therefore, while compensation costs decreased in 2021/22, costs could increase in future years. The FSCS will publish its next Outlook later this year which will provide an update to its levy forecast for 2022/23 and its initial view on 2023/24.