The Financial Conduct Authority has been urged to rethink investment risk warnings, amid concern they actively deter engagement with long-term investing, according to a landmark report by the Investment Association.
The Risk Warnings Review, commissioned by the Chancellor as part of the Leeds Reforms and undertaken by industry, government and regulators, sets out how investment risk can be communicated more effectively so consumers can make properly informed decisions.
It says that standardised phrases such as ‘capital at risk’ have become a compliance standard rather than an effective tool for consumer understanding.
With the lowest rate of personal investment in the G7 and large numbers of people holding cash savings, the report recommends a series of practical changes, including moving away from the widespread use of standardised risk warnings.
According to the report, current warnings are either widely misunderstood by savers, deterring their engagement with long-term investing, or frequently ignored by seasoned investors.
In contrast, simple and accessible explanations of how investments can rise and fall, presented alongside relevant benefits and explicit time horizons, are more likely to be read, understood and trusted.
The report makes a series of recommendations, underpinned by four key principles: disclosure on risk should be contextualised and balanced; clear and accessible language should be the basis for all communication with consumers; statements in communications with consumers should be proportionate, credible and effective; and risk messages should be fitted to the consumer journey.
Chris Cummings, chair of the Review and chief executive of the Investment Association, said: “This Review marks an important turning point in how we talk about investing in the UK. For too long, well-intentioned rules and industry caution have resulted in warnings that overwhelm rather than inform, discouraging people from taking the long-term decisions that could strengthen their financial resilience.
“Our findings show a clear path forward, one where firms can communicate risk in a way that is balanced, contextual and genuinely helpful for consumers.”
Cummings said that in the months ahead, the IA will support firms to put the recommendations into practice and deepen its engagement with the FCA and industry partners.
Sarah Pritchard, deputy chief executive of the FCA, said: “We want to see a stronger investment culture in the UK so consumers are better supported in navigating their financial lives. That culture relies on consumer confidence which is built by clear, balanced information about the potential rewards and risks.
“We welcome the review’s push to make the way risk and reward is communicated clearer to consumers, rather than a tick box exercise.”
Industry reaction
Industry experts welcomed the findings.
James Heal, director of public policy at St. James’s Place, said: “The updated guidance should give firms greater confidence to talk about investing in a way that is clear, proportionate and genuinely focused on consumers.”
Heal said the guidance supports a more balanced approach to risk disclosures, including reducing the use of risk warnings where they add little value.
“It makes clear that explaining risks in a way that helps consumers understand their nature and likelihood is permitted because it does not amount to diminishing those risks.
“Our recent behavioural science report into retail investing showed that small changes in how investing is communicated can have a meaningful impact on confidence and willingness to invest. This new guidance should lead to better quality communications that inform rather than deter, helping more people to engage with investing in a considered way that supports their long-term financial resilience.
“We welcome the FCA working with industry to deliver this guidance and, alongside other initiatives such as the Retail Investment Campaign, this is an important step towards fostering a healthier investing culture in the UK.”
Steve Gazard, chief distribution officer at Quilter, said: “It is vital for the personal finances of this country that we help consumers move from a culture of saving to one of investing where possible. The opportunities that the Advice Guidance Boundary Review and Targeted Support can bring, alongside the public awareness that the Retail Investment Campaign, will begin to stimulate some of that change.
“However, for those things to have a chance of succeeding in their aims, we can’t then put people off with old fashioned, static and compliance led risk warnings. This is why the work of the Risk Warnings Review from the IA is so important. These recommendations will allow the industry to move to more engaging and understandable disclosures inserted in the right place in the customer journey.”
Gazard said the review should lead to firms having the scope to be more creative and engaging in the ways they talk about risk and effectively present the positives and potential drawbacks of investing and how it differs to cash saving.
“Ultimately, we are supportive of the recommendations the review has produced, and it gives practical guidance to firms to adopt, alongside ensuring a supportive regulatory environment where firms can operate with confidence. We do not see a repeat of prescribed phrases that the industry previously defaulted to,” he added.
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