Independent financial advisors will soon have to report to The Financial Conduct Authority (FCA) when they recommend potentially high risk investment products to clients.
The changes will see IFAs having to inform the FCA if they wish to recommend high-risk investments such as overseas property, storage pods and forestry schemes.
High risk investments should only be recommended to people who have enough money to afford the level of risk they’re taking on. According to the FCA, in order to be able to afford high risk investments, these people need to be “high net-worth individuals earning over £100,000” or “sophisticated investors”.
Often, such investments are recommended to people who don’t understand the amount of risk they’re opening themselves up to.
When an IFA recommends a particular investment without properly explaining the possibility for financial losses, this is considered mis-selling. In some cases, this could see clients eligible for compensation if they’ve been sold an inappropriate pension product that they were unprepared for.
Despite the legal implications for IFAs who are guilty of mis-selling, in the last year, the Financial Services Compensation Scheme (FSCS) has paid out over £105 million to people who were encouraged to invest in these high risk products through SIPPs.
Life and pension intermediaries picked up the bill for this as they were asked to pay a £126 million levy.
Following the FCA’s annual public meeting in July, chief executive Andrew Bailey said: “I do regard this cost falling onto other firms directly via the FSCS, and the fact that there isn’t really a risk-based insurance system, as an issue that we are very much engaged with and wrestling with.”
In a board meeting in October, the FCA approved the additional reporting requirements which are set to come into force on the 1st April 2018.