Consumer Investments Strategy - 2 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 make it easier for firms to support consumers to invest in straightforward products, deliver the Consumer Duty, and to improve consumer pension outcomes.

Giving consumers the confidence to invest: In November 2022, we published CP22/24[16] which set out initial proposals for a ‘core investment advice’ regime.  The aim of this work was to allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investing into mainstream products, specifically within stocks and shares ISAs (S&S ISAs). This was intended to address the Mainstream Investments Outcome by creating a means to support consumers who may benefit from investing in line with their risk appetite, but who currently hold excess cash savings. 

The potential for more significant change is now possible through the Advice Guidance Boundary review, and in August 2023 we announced[17] we would roll the development of the regime into the broader review. This will allow us to support the more substantial changes being sought and considered through the review. 

Alongside our announcement, we also published information to help firms provide more support to customers making investment decisions[18]. 

Through our Innovation Pathways and Regulatory Sandbox, we have continued to provide tailored regulatory guidance to new firms, giving them access to vital regulatory expertise and a set of tools to enable them to test products and services. Firms we supported in 2022/23 were primarily those trying to address the advice gap by providing digital advice and guidance journeys.

Improving consumer investment outcomes: The Consumer Duty came into force for new and existing financial products and services on 31 July 2023. 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. In the run-up to implementation, we wrote to all consumer investment firms[19], and provided a range of support materials and events to help firms understand our expectations and what the Duty means for them.

We have seen firms carry out significant work to make sure their products and services are in line with the higher standards that the Duty expects, for example making changes to product charges, how they support vulnerable customers and improvements to management information to make customer outcomes more visible. We have been clear that compliance with the Duty is not a one and done exercise, and firms need to consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers.

Improving consumer pension outcomes: As one of the main ways that consumers invest for their future, pensions are a core element of the mainstream market. We have progressed a range of initiatives to improve consumer pension outcomes.

We want pension schemes to deliver the best possible value and drive better long-term outcomes for pension savers. To deliver this, we jointly consulted[20] on a new Value for Money framework for Defined Contribution pensions. This aims to shift scheme and employer focus from predominantly costs to a longer-term and holistic view of value, including investment returns. We published our joint response[21] to feedback received in July 2023.

We identified that non-advised consumers buying a non-workplace pension (NWP) can find it difficult to engage, resulting in them choosing products unlikely to meet their objectives or consumers putting off buying an NWP at all. We therefore set out final rules[22] to improve outcomes for consumers saving into NWPs. These rules require pension providers to offer a ‘default’ option to non-advised consumers buying an NWP and issue a ‘cash warning’ to consumers with significant and sustained levels of cash in their NWP. These rules come into force in December this year.

In July 2023, we published our post-implementation review[23] of investment pathways, which support non-advised consumers to align their drawdown investment with their objectives.

To ensure consumers achieve the same good outcomes regardless of pension type, and demonstrating our commitment to continue working closely with The Pensions Regulator (TPR), in December 2022 we published our FCA/TPR regulatory strategy update[24].

We are working with industry on behavioural field trials to test and understand effective touchpoints for engaging customers with their pension. The findings will add to the sum of knowledge in the pensions sector and the findings may also be used by firms in support of their approaches to engaging customers to comply with the Consumer Duty. We have published the results from the first stage of this research[25] alongside this publication.

Update on the outcome

Table 3: Outcome metrics

*While the % figures have changed over time, the change is not statistically significant. Where we pick out results in the report text, they are always statistically significant to a confidence level of 95%, unless we explicitly say they are not. This means that there is less than 5% chance that this difference would have been observed in the survey, if there was no significant difference in the actual population. By ‘chance’ we mean the probability of errors associated with sampling.

The proportion of UK adults with £10,000 or more of investible assets (with the majority or all of this in cash) has increased in the last year. The proportion of these who have some appetite to take investment risk has remained the same (44%).

Increases in cash savings rates mean consumers currently have more ways in which they can make their money work for them, and some consumers may have made a conscious decision not to invest at this time. Our cash savings work has included taking steps to make sure there is a competitive cash savings market[26] that delivers better deals for savers, ensuring banks and building societies are passing on interest rate rises to savers correctly. 

Whilst consumers now have more options for their cash savings, those with significant excess cash assets, that have some appetite for investment risk and no plan to access their cash in the short to medium term, might benefit from support to do more with their money rather than leave it in cash in the longer-term.

Looking ahead, we will be increasing our focus on improving the mainstream market for firms and consumers. The Advice Guidance Boundary review aims to ensure that consumers get the help they want, at the time they need it, and at a cost that is affordable, to help them make informed financial decisions – this is especially important with the cost-of-living pressures.

In addition to the Advice Guidance Boundary review, we are working on a range of initiatives, including those which will implement HM Treasury’s Smarter Regulatory Framework (SRF). In Preparing for the future of Consumer Investments[9] we set out how our upcoming work will look to deliver a regulatory environment that facilitates good consumer outcomes.  

Outcome

Reduce the number of consumers investing in high-risk investments 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 strengthening 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: One of the main ways consumers build their understanding of the risks and regulatory protection for investments is through the information they get in financial promotions.

High-risk investments have a place in a well-functioning-consumer investment market for those who understand the risks involved and can absorb potential losses. However, our consumer research showed that too many consumers were investing in high-risk products which were not aligned with their risk tolerance and were unlikely to meet their needs. So we introduced new rules to strengthen the financial promotions regime for high-risk investments (PS22/10[26]) phased in from 1 December 2022. The rules are designed to ensure that firms communicating and approving financial promotions for high-risk investments do so to a high standard, ensuring consumers receive high-quality financial promotions that enable them to make effective, well-informed investment decisions. We carried out supervisory work to monitor compliance and published our findings[27] in September 2023.

Financial promotions rules for cryptoassets (PS23/6[28]) came into force on 8 October 2023 (with the option for firms to be given until 8 January 2024 to introduce features that require greater technical development). These rules require cryptoasset firms’ marketing to be ‘clear, fair and not misleading’, labelled with prominent risk warnings and to not inappropriately incentivise people to invest. These rules apply to firms wherever they are based globally and help strengthen how UK consumers are protected from the high risks associated with cryptoassets.

Our financial promotions data showed we required firms to amend or remove 8,582 promotions during 2022[29] - 14 times more than 2021. So far in the first three quarters of 2023 we have required firms to amend or remove 9,052 promotions, a further increase from last year. In April 2023, we produced an infographic for influencers to help them identify what could be an illegal financial promotion.

We published a consultation paper on updated guidance for financial promotions on social media[30] in July 2023. The new guidance consultation recognises that social media has become an increasingly vital part of firms’ marketing strategies and aims to clarify expectations in this evolving area.

The legislation that underpins the new authorisations gateway (S21 Gateway) for firms that approve financial promotions for unauthorised persons has been finalised. We published our Policy Statement (PS23/13[31]) and near final rules on how we will implement the gateway on 12 September 2023. The rules have now been made final. Firms that apply to approve financial promotions will undergo a robust assessment to ensure they have the competence and expertise to approve financial promotions for the investment types selected in their applications. We began accepting applications on 6 November 2023.

InvestSmart Consumer Campaign: This year we continued our InvestSmart campaign, which aims to help less experienced investors make better-informed investment decisions more suited to their appetite for risk. This includes an innovative targeted cinema advert[32] before the film ‘Dumb Money’, which profiles the GameStop episode.

Findings from our latest tracking survey indicate that since the launch of the campaign, consumers are 24% more likely to say they would be careful by doing research to reduce the chances of them losing money in high-risk investments. They are also 24% more likely to look to learn about investing from reputable information sources. One of these sources is 15% more likely to be the FCA website.

Deploying our regulatory toolkit: We have continued to focus on our regulatory resources on acting against firms and individuals who cause consumer harm:

• Preventing harm at the gateway: In 2022/23, 1 in 5 new consumer investments firm applications were withdrawn or rejected because they could not demonstrate they could meet minimum standards on an ongoing basis.
• Acting against firms and individuals who cause consumer harm: Over 2022/23 we obtained just under £5m in consumer redress from unauthorised investment business and published 1,716 consumer alerts about unauthorised firms and individuals. In November 2022 we issued a warning to trading app-operators[33] and published research titled Gaming trading: how trading apps could be engaging consumers for the worse[34].  

Update on the Outcome

Table 4: Outcome metrics

*We ask survey respondents how willing they are to take risk when investing, on a scale of 0-10. We say people who scored themselves 4 or more have some appetite to take investment risk; people who scored themselves 0-3 have ‘very low’ appetite.

**While the % figures have changed over time, the change is not statistically significant. Where we pick out results in the report text, they are always statistically significant to a confidence level of 95%, unless we explicitly say they are not. This means that there is less than 5% chance that this difference would have been observed in the survey, if there was no significant difference in the actual population. By ‘chance’ we mean the probability of errors associated with sampling.

Table 5: High-risk investments

The proportion of UK adults owning high-risk investments increased between 2020 and 2022. This was driven primarily by an increase in ownership of cryptoassets which tripled in this period. 2023 data shows a small decline in cryptoasset ownership, but we have not seen a return to 2020 levels. While ownership of other types of high-risk investments has remained relatively steady, cumulatively, we have seen a reduction in ownership of high-risk investments in 2023.

As set out in Table 4, we have two measures for high-risk investment holdings relating to risk tolerance and vulnerability from the Financial Lives survey:

• Restricted list of high-risk investments: The proportion of UK adults holding high-risk investments (the list used at time of original Consumer Investment Strategy was restricted to cryptoassets, P2P lending, Innovative Finance ISAs, investment-based crowdfunding) who have one or more characteristics of vulnerability or have very low general risk tolerance
• Wider list of high-risk investments: The proportion of UK adults holding high-risk investments (a wider list of products introduced in 2022, includes the investments above plus CFDs, shares in unlisted companies and mini-bonds) who have one or more characteristics of vulnerability or have very low appetite for investment risk

We see two different trends when looking at these metrics.

In the ‘wider’ group, we see the numbers have remained relatively steady over 2022 and 2023.

However, when we look at the more ‘restricted’ measure, we see there has been a 9-percentage point increase in the proportion of UK adults holding high-risk investments who have one or more characteristics of vulnerability or have very low general risk tolerance over the same period. From our analysis of the Financial Lives survey data, it appears that the increase is driven by an increase in the proportion of consumers who have very low general risk tolerance (not restricted to investment risk), and not driven by an increase in the number of vulnerable customers generally or vulnerable customers holding high-risk investments. This change in general risk appetite may be driven by consumers being more cautious due to the cost-of-living crisis.

As the work we have outlined above takes effect, we will continue to monitor the level of consumers investing in high-risk investments that have a low appetite for risk or that have characteristics of vulnerability, and take action where we see the situation getting worse.

The Consumer Duty, which became effective for open products and services in July 2023, requires firms to ensure that their products and services are appropriately designed for the needs and objectives of their target market. It also requires firms to ensure these products and services are being promoted and distributed effectively, with due consideration paid to any vulnerable customers. This is particularly important for any manufacturers or distributers of higher-risk or complex products. We will be paying close attention to how these firms define their target market, monitor distribution, support vulnerable customers, and evidence that vulnerable customers are getting good outcomes.

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, information-sharing and cooperation with external partners and our work to disrupt unauthorised businesses. 

Deploying our regulatory toolkit: We continue to act against firms and individuals who are carrying out regulated activities but not authorised or exempt under FSMA; as these are likely to be scams or involved in some aspect of fraud.

Table 6: action against unauthorised firms and individuals

Tackling scams faster: We continue to tackle scams faster as part of our data strategy, scanning approximately 100,000 websites created every day to identify those that appear to be scams. In 2022/23 we added 1,716 possible scams to our consumer Warning List.

• We have strengthened consumer protection by speeding up removal of firms that do not use their regulatory permissions. In 2022, we cancelled the authorisation of 627 firms that failed to meet our minimum standards or stopped being eligible for authorisation, an increase of 30% compared to 2021. This includes the use of the new powers we introduced to support our ‘use it or lose it’ initiative.
• We have continued to influence search engines and social media firms to prevent scams and other illegal financial promotions being published. As a result, we have seen a near 100% reduction in illegal paid-for advertisements on Google and Bing.

Providing direct consumer support through our Consumer Helpline: Between April 2022 and March 2023, we received nearly 100,000 enquiries from consumers with around 17% of these about potential investment scams.

ScamSmart Consumer Campaign: ScamSmart ran a pensions scams campaign between October and November 2022. In February 2023, we launched a ScamSmart investment campaign to increase awareness among 21–54-year-olds. Data shows that visitors to the website continue to increase.  Those who go on to check a potential investment have declined over the last year while more have checked our Warning List.

Table 7: ScamSmart data table

Making reducing financial crime a business priority: As part of our Financial Crime Commitment, we have established a dedicated, specialist Financial Crime function within our Consumer Investments directorate. The function’s core activity is carrying out pro-active disruptive work and taking assertive action to deal with financial crime. By using stakeholder relationships and making better use of intelligence and data, the team will proactively identify and address fraud and money laundering in consumer investments increasing the number of on-site visits and inspections.

Update on the outcome

Table 8: 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[20] 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, we can see improvements with reduced investment scam activity indicated by enquiries to our consumer helpline, reported volumes and losses all declining (although not yet to 2020/21 levels).

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 FSCS 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 Professional Indemnity Insurance (PII) market.

Addressing the pension issues driving Financial Services Compensation Scheme (FSCS) costs: Unsuitable Defined Benefit (DB) pension transfer advice and past failings in firms’ due diligence about non-standard assets held in SIPPs continue to drive FSCS costs.

We continue our work ensuring consumers who were given unsuitable advice to transfer out of Defined Benefit (DB) pensions receive timely and fair redress. This includes continuing to support the delivery of the s404 redress scheme for former members of the British Steel Pension Scheme (BSPS).

This year we made Asset Retention Rules for BSPS complaints to help reduce the risk of firms dissipating their assets while owing redress. As at the end of March 2023, of the approximately 352 firms that advised on the BSPS, 151 firms responsible for advising and arranging around 3,000 of the nearly 8,000 BSPS transfers were covered by these rules.

During 2022, we concluded some multi-firm work on SIPP operator due diligence. This work found that, while many SIPP operators no longer willingly accept non-standard investments, many firms still needed to improve their controls over intermediaries, particularly discretionary investment managers.

Investigating changes to prudential requirements for non-MiFID adviser firms: Most advisors are categorised as personal investment firms (PIFs). PIFs are subject to prudential regulation by the FCA. We have published a consultation[35] on our proposals for a new capital deduction for redress for PIFs. This would require these firms to set aside capital for potential redress liabilities, and if they are not able to do this they would be subject to an asset retention requirement. Within the consultation we have included a discussion chapter on the wider prudential framework for PIFs and how this could be improved. The consultation is open until 20 March 2024.

Reviewing the compensation framework: We published our Compensation framework review: response to feedback and next steps FS22/5[36] in December 2022. We continue to progress the key actions set out in our feedback statement. Our future work will be shaped and informed by consumer research to improve our understanding of the impact of FSCS protection on consumer decision-making, confidence and behaviour. We will consider any further work alongside other work looking at retail investments.

Addressing misuse of the Appointed Representatives (AR) regime: Some of the largest AR networks operate in the Consumer Investments sector. Our new rules[37] and guidance which set higher standards for principal firms took effect on 8 December 2022. As part of the new rules, principals must now give us more information about their ARs. In a recent publication[38] we set out how we are using data to inform our supervisory approach, including examples of how we have used data to intervene to prevent harm.

Update on the outcome

Table 9: Outcome metrics

The FSCS total LDII and IP forecast for 2022/23 was estimated at £446m, but costs only materialised at a much lower £234m. This created additional surpluses, with the largest surplus found in the LDII. The FSCS noted that lower volumes of pension decisions were made, and some assessments determined no financial loss. Surplus under IP was for claims expected in 2022/23 that are now expected in 2023/24 and later years.  

In the recent May 2023 outlook[39] the FSCS noted that while the level of compensation they expect to pay out this year is lower than recent years, they have no evidence that there is a sustained downward trend as compensation costs for 2023/24 are expected to be higher than the current year.