The FCA announced recently that it is to introduce new rules for high-risk investments. It saying that too many people are still investing in inappropriate investments and that they are concerned that too often consumers are investing in high-risk investments they don’t understand which can lead to significant and unexpected losses. Unbelievably (for some, including me) their research shows almost half of private investors do not consider losing money as a risk of investing!
Is there a feeling of over-confidence born out of a sustain period of stock market growth, particularly in sectors like technology, where investor momentum has arguably pushed some stocks to dizzy heights? One area where we have seen a boom has been the use of trading apps which make the buying and selling of stocks and shares easier than doing your online supermarket shop. It is no surprise that the volume of trades in penny stocks has increased 2,000% over the past year. The lure of getting rich quick is nothing new. Investing in penny stocks and crypto currencies is speculation at the highest level. The risk is considerably higher than buying an exchange-listed stock because of a lack of regulations and oversight. Penny stocks are also more prone to being the subject of a pump and dump scheme, in which promoters quietly buy stock, release promotional materials, and then sell the stock on unsuspecting retail investors.
The FCA’s proposals include the strengthening of their financial promotion rules, the classification of high-risk investments market and improved risk warnings which it said do not currently ‘convey the genuine possibility of an investment loss’. There are also proposals for requiring individuals to watch educational videos, or to pass online tests to demonstrate knowledge about financial products. Feedback to the discussion paper is open until 1 July. The FCA will consult on rule changes later this year.
At Wingate we make sure our clients understand the risk they are taking. Ensuring that the level of risk is appropriate to their situation and objectives. Risk levels of investment portfolios are continually measured and rebalanced, as part of our portfolio review service. If you would like to understand your investments and your risk exposure please contact us for a no obligation initial discussion.