23Jan

The Financial Conduct Authority has issued another warning about cryptoassets. Specifically, this one relates to investment promotions that promise high returns.

The FCA’s warning is couched in very stark terms and spells out exactly how big a risk consumers are taking by getting involved in this area:

“Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money.”

Furthermore, consumers are warned that they are unlikely to be able to take complaints about cryptoassets to the Financial Ombudsman Service, and that they may not enjoy the protection of the Financial Services Compensation Scheme should their provider fail.

The FCA summarises its concerns for consumers as:

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to any regulation other than that required under anti-money laundering requirements
  • Price volatility: Significant price volatility in cryptoassets, together with the difficulties of valuing cryptoassets reliably, mean that there is a high risk of loss
  • Product complexity: These are very complex products which may be difficult for the average consumer to understand. There is no guarantee that cryptoassets can be converted back into cash, and whether this is possible depends on demand and supply in the market at the time – again something which might be a difficult concept for a layperson to understand
  • Charges and fees: these products may have higher charges and fees than other investment products
  • Marketing materials: Firms may use cryptoassets marketing material to overstate the potential returns of products and/or understate the risks involved

Firms who are active in this area are reminded that they must now be registered with the FCA under regulations to tackle money laundering.

Trade association the Personal Investment Management & Financial Advice Association (PIMFA) welcomed the FCA statement but called on the regulator to take further action on financial promotions.

Tim Fassam, Director of Government Relations and Policy at PIMFA, said: 

“We fully support the Financial Conduct Authority warning consumers about the dangers of high-risk investments that individuals may not fully understand. But we do not think warnings of this nature go far enough to protect consumers from bad actors, particularly during a period of economic hardship that many families may be experiencing due to the continuing COVID pandemic.

“PIMFA urges the Regulator to take action to more tightly control financial promotions. While we broadly support the idea that consumers should educate themselves about investments and understand the risks involved, the spread of online financial promotions means that consumers are at far greater risk of scams than they have ever been.

“Towards the end of last year PIMFA called for financial promotions to become a regulated activity. PIMFA also strongly believes that the forthcoming Online Harms Bill should include financial services to provide greater protection for consumers. Both of these reforms would provide a far greater level of protection for consumers. Without this greater level of protection, we run the risk of financial promotions, particularly online financial promotions, escalating out of control and thousands of potentially vulnerable consumers being exploited.”

The FCA has already banned the sale, marketing and distribution of Bitcoin and other crypto-derivative products to ordinary retail investors.