Dear CEO | Release Date: 17th August 2021
To read a longer summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Short Summary
The Financial Conduct Authority (FCA) has communicated updated supervisory expectations and strategies to CEOs of investment-based crowdfunding (IBCF) firms. This follows concerns highlighted in their 2020 communication regarding the IBCF market’s risks. The FCA emphasises the necessity for these firms to ensure investments are suitable for their consumers, acknowledging the enhanced risks involved with high-risk investments. The regulator is particularly concerned that advancements in technology, despite marketing restrictions, continue to allow significant consumer exposure to unsuitable high-risk investments.
Firms are urged to verify investor categorisations and ensure comprehensive understanding among consumers regarding the associated risks. The FCA is concerned about the potential for consumers to over-invest in high-risk ventures, holding more than 10% of their portfolios in such investments, likely against their best interests. It stresses the importance of firms performing diligent assessments of both the investments they offer and the clients investing in them, ensuring clear communication about the associated risks and the investment’s suitability.
Moreover, the FCA plans to strengthen regulations concerning the promotion of high-risk investments and is closely monitoring firm compliance with current guidelines, particularly concerning the management of conflicts of interest and the operational execution of their business models.
Key Takeaway:
CEOs must ensure that their firms have robust systems to assess investor suitability, categorise investors accurately, and educate them about the risks. They should also conduct thorough due diligence on investments, manage conflicts of interest effectively, and prepare for potential firm failure by maintaining adequate financial resources and an effective wind-down plan. The FCA will hold management accountable for any failures to meet these expectations, emphasising the importance of compliance in protecting consumer interests.