A new report from the Financial Conduct Authority (FCA), a regulator, reveals its current concerns about the financial markets and therefore areas which it might look to clamp down on in the future.

In particular, the FCA notes the steady growth in retail investor activity and the challenges that come with a greater number of people managing their own money or turning to third parties for help.

It is keeping tabs on the changes driven by the low interest rate environment, policy and regulatory changes and technological developments, and says a disparity in inter-generational wealth will play a part in how the sector develops over the long-term.

As the report explains: ‘Younger consumers will not be able to look forward to the same pension benefits as older consumers. It will put them under pressure to build up meaningful levels of long-term savings to see them through retirement.’

Its main concerns relate to the suitability and quality of products and services, the level of charges levied on investors and the risk of financial or data loss from financial and cyber crime.

It also highlights the fact that, when you take pensions out of the equation, only a third of the UK population holds any form of investment product.

WHAT CHANGES DOES IT IDENTIFY?

One of the big changes highlighted by the FCA is the growth of investment platforms, both direct-to-consumer and adviser platforms. It also notes the use of model portfolios to make investing simpler by offering portfolios with a broad risk label like ‘cautious’ or ‘adventurous’.

It says consumers have been investing in more complex products like contracts for difference, crowdfunding and structured products but adds the total amount invested in such areas is ‘relatively small’.

In addition, it anticipates growth in automated advice with some of the big retail banks planning to launch services in 2019. While this could increase access and affordability of financial advice it also notes automated advice is still ‘relatively untested’ as a concept.

WHAT KEY RISKS DOES IT FLAG?

One of the biggest concerns in the report is unsuitable advice on making transfers from defined benefit to defined contribution pension schemes. It also notes ‘the market is failing to provide consumers with the tools to understand their retirement needs when it comes to product selection’.

In general the availability of advice for people with small investment pots remains limited, creating a risk that investors pay for advice they don’t need or invest in unsuitable products.

The regulator also fears confidence and participation in financial markets could be threatened by a combination of financial crime, cyber crime and technological disruption.

With a growing proportion of assets being invested using artificial intelligence it adds: ‘The speed of machine reactions could have serious consequences. If artificial intelligence using an algorithm were to make an inappropriate asset management decision, any resulting losses could be quickly compounded.’

HOW DOES THE FCA VIEW INVESTMENT PLATFORMS?

The FCA is expected to imminently update the market on its review of investment platforms. Its findings so far suggest the market is working well in some areas with levels of satisfaction high but it does flag the difficulty of switching between platforms and the way fund charges are presented among other concerns.

WHAT COULD IT MEAN FOR FUTURE REGULATION OF
THE INDUSTRY?

To the likely relief of many industry figures, the FCA acknowledges the sheer volume of new rules which have been introduced in recent years. It says: ‘The complexity and volume of regulation does raise some concerns over execution risk, potential operational risks and potential fee increases.’

One area which could be targeted by the FCA is model portfolios and the lack of consistency in how risk categories are defined.

Findings from its review of investment platforms which relate to model portfolios will be applicable to other distribution channels and any remedies proposed may also be applied more widely.

The focus in the report on exchange-traded funds (ETFs) suggests they too might be in for tighter regulation, with the FCA clearly worried that investors do not always understand the price of an ETF and the net asset value of the underlying fund can diverge significantly.

The FCA has launched a consultation paper on investment-based crowdfunding and this is clearly another area being looked at closely, particularly in an environment where people are looking further afield for high-yielding products.

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