Today the FCA published a 41-page discussion paper, DP21/1, setting out early proposals that seek to make it harder for retail investors to invest in 'high risk investments'.
The regulator plans to move quickly, with the rule changes taking place later this year.
What is deemed high risk?
The affected investment includes those that the FCA currently has placed extra restrictions over, including:
non-readily realisable securities (unlisted equity and debt )
non-mainstream pooled investments (many unauthorised funds and certain SPVs)
peer-to-peer agreements (online lending to individuals, corporates and property)
speculative illiquid securities (certain bonds, debentures and preference shares - now to be extended to include equity)
Sectors ranging from venture capital, impact investing, corporate finance, crowdfunding and many asset managers are therefore likely to be impacted by these changes.
It's certainly worth reviewing the definitions section in Chapter 2 of the paper to understand how you are caught. The FCA is looking for feedback on whether any other investment types should be captured by the definition.
Key Proposals
A range of proposals are laid out in the paper and these are the ones that struck us most:
Creating friction
'Positive friction' - such as SMS confirmations and education videos - is to be introduced to the investment journey as one of the methods to make it harder to sell high-risk investments, particularly to self-directed investors.
Policing self-certification
There are plans to introduce stricter controls around categorisation of investors so that regulated firms need to check someone is genuinely high net worth or sophisticated.
S21 approvals
More responsibilities are set to be placed with authorised firms approving financial promotions for unregulated parties to help ensure ongoing compliance.
Next Steps
The FCA is seeking feedback by 1 July 2021 on whether its plans are going in the right direction. If your firm is affected, we recommend reviewing the paper, considering the impact and sending in any views.