The Financial Conduct Authority has written a portfolio strategy letter to the CEOs of all investment crowdfunding firms, setting out what the regulator believes to be the principal risks affecting this sector. The letter’s author is Debbie Gupta, the FCA’s Director of Consumer Investments Supervision.
According to the letter, these risks include:
- Technological advances have made complex investment easier to set up and, as a result, too many consumers are investing in inappropriate high-risk investments which do not meet their needs
- Firms are not paying sufficient attention to how they ‘classify’ their customers, i.e. as ‘restricted’, ‘high net worth’ or ‘sophisticated’ investors. Firms must not only pay close attention to this, but must also maintain comprehensive records of these categorisations
- Many consumers may be holding more than 10% of their investment portfolio in high risk and speculative areas, which the FCA believes is unlikely to be in their interests
- Some firms are not effectively managing conflicts of interest, or disclosing these to customers when they arise
- Poor due diligence is leading to investors being at risk from fraud and investment scams
- Inadequate cyber controls could result in client data being lost or stolen and subsequently being used to defraud individuals
- Many firms are failing to supervise their Appointed Representatives adequately
- There are concerns about levels of capital and liquidity at some firms
- Some firms do not have adequate arrangements for an orderly wind-down of their affairs, should this be necessary
The letter calls on firms to “take reasonable steps to reduce the risk that investors hold more than 10% of their portfolio in this type of high risk and speculative investment as this is not likely to be in their best interests.”
On this subject, the letter adds that “it is important that your customers understand the risks they will be exposed to by the investments your firm promotes.”
Regarding scams, the letter says firms must take steps to ensure they do not promote anything that might be described as a scam. It also calls on firms to educate their customers about the risks of fraud and scams.
The FCA also warns that it is examining the possibility of introducing stricter financial promotions rules for higher risk investments.