The Financial Conduct Authority (FCA) has published research findings into better understanding investors who engage in high-risk investments like cryptocurrencies and foreign exchange.
The findings reveal there is a new, younger, more diverse group of consumers getting involved in higher risk investments, potentially prompted in part by the accessibility offered by new investment apps. However, there is evidence that these higher risk products may not always be suitable for these consumers’ needs as nearly two thirds (59%) claim that a significant investment loss would have a fundamental impact on their current or future lifestyle.
The research found that for many investors, emotions and feelings such as enjoying the thrill of investing, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest. This is particularly true for those investing in high-risk products for whom the challenge, competition and novelty are more important than conventional, more functional reasons for investing like wanting to make their money work harder or save for their retirement. 38% of those surveyed did not list a single functional reason for investing in their top 3.
Sheldon Mills, Executive Director, Consumer and Competition at the FCA said: 'Much of the consumer investments market meets consumers’ needs. But we are worried that some investors are being tempted - often through online adverts or high-pressure sales tactics - into buying higher-risk products that are very unlikely to be suitable for them.
'This research has helped us better understand what drives and motivates consumers so we can tell them about the risks involved in these investments through our investment harm campaign.
'We want to make sure that we encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative that consumers do so with savings and investment products that have a suitable level of risk for their needs. Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high risk products.
'We also hope our research will provide valuable insights for other organisations that are involved in tackling harm in this market.'
The research shows that investors often have high confidence and claimed knowledge. However, it also shows a lack of awareness and/or belief in the risks of investing, with over 4 in 10 not viewing ‘losing some money’ as one of the risks of investing, even though as with most investments their whole capital is at risk. In some cases, investors can lose more than they initially invested for example with contract for difference investments. These investors also have a strong reliance on gut instinct and rules of thumb, with almost four in five (78%) agreeing “I trust my instincts to tell me when it’s time to buy and to sell” and 78% also agreeing “There are certain investment types, sectors or companies I consider a ‘safe bet’”.
Research findings indicate that this newer audience has a more diverse set of characteristics than traditional investors. They tend to skew more towards being female, under 40 and from a BAME background. This newer group of self-investors are more reliant on contemporary media (e.g. YouTube, social media) for tips and news. This trend appears to be prompted by the accessibility offered by new investment apps.
These younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss. Research showed that a significant loss could have a fundamental lifestyle impact on 59% of self-directed investors with less than 3 years' experience, who are more likely to own high risk investment products, compared with 38% of investors with greater than 3 years’ experience.
Tackling harm in the consumer investment market is a priority for the FCA. The FCA commissioned BritainThinks to conduct in-depth research into self-directed investors’ behaviours, attitudes and financial resilience. Together with feedback from its Call for Input on the consumer investment market, this research will underpin the FCA's work in the consumer investment market. In particular, the research will help design a new campaign to address the harm caused from consumers investing in high risk, high return, illiquid investments that may not be suitable for their needs.
Alongside the publication of this research, the FCA has today launched its digital disruption campaign to prevent investment harm. The campaign uses online advertising to disrupt investors’ journeys and drive them to the high return investments webpage – which covers key questions consumers should ask before investing.
The FCA advises consumers to consider five important questions before they invest:
- Am I comfortable with the level of risk?
- Do I fully understand the investment being offered to me?
- Am I protected if things go wrong?
- Are my investments regulated?
- Should I get financial advice?
The FCA has recently published work to tackle consumer harm in the investment market including banning the mass-marketing of speculative mini-bonds and will set out its further plans later this year. The regulator also published a warning to consumers on the dangers of investments advertising high returns based on cryptoassets.
Notes to editors
- Understanding self-directed investors research report.
- The project was conducted with BritainThinks, an international insight and strategy consultancy. The research surveyed 517 self-directed investors and was conducted 18th August 2020 – 20th January 2021.
- For the purposes of the report the FCA defines self-directed investors as those who are making investment decisions on their own behalf, i.e. selecting investment types and making trades themselves rather than seeking financial advice.
- In September the FCA issued a Call for Input on the consumer investment market, asking for comment on how consumer protection can be improved. Responses to this are under review and the FCA has already acted to ban the mass-marketing of speculative illiquid securities (including speculative mini-bonds) to retail investors.
- Read a summary of our work to tackle consumer harm in the investment market, between 1 January and 31 October 2020.
- Investment harms consumer webpage.
- The FCA is examining intergenerational differences in the financial needs and circumstances of each generation which has been updated to reflect the impact of the covid-19 pandemic.
- Protecting vulnerable consumers is a key focus for the FCA. Our Business Plan for 2020/21 states that we will focus on making sure that the most vulnerable are protected.
- Find out more information about the FCA.