FCA proposes big shake-up of HNW exemption from retail rules


High-net-wealth (HNW) and sophisticated investor exemptions from retail investment rules could be radically overhauled, the Financial Conduct Authority (FCA) has proposed.

It said it had found evidence that unregulated firms had ‘coached’ individual investors in how to dodge retail investment rules as part of their sales strategies.

Changes to the current system were part of a package of proposals suggested by the FCA in a call for input on how it could improve the regulation of consumer investment.

Unregulated firms are currently permitted to promote products to HNW investors, classified as those who either earn £100,000 or more annually, or own more than £250,000 in net assets, or those who self-certify their status as ‘sophisticated’ investors.

The FCA highlighted that that the financial threshold for exemption had not changed in two decades.

The current rulebook is widely perceived to have been abused, with mini-bond manufacturer London Capital & Finance collapsing last year with the vast majority of the £236m invested in the firm missing.

The company had exploited a loophole in the current rulebook to promote its products to small investors by packaging them in regulated wrappers such as ISAs.

The FCA subsequently banned minibond adverts in January this year, after years of criticism of how the products are advertised to yield-hungry clients.

It said: ‘We have also seen evidence of firms abusing these exemptions by coaching people through them. Investors who do not, in practice, meet the tests set in legislation are being pushed through them, often by unregulated firms.

‘This unscrupulous behaviour is sometimes helped by the appeal to some retail investors of self-certifying themselves as sophisticated or HNW and the sense of exclusivity that the exemptions provide.

‘Where this occurs, investors are not getting the protection of our rules when they should be.’

The watchdog added that the practice is ‘inherently difficult for us to police’ as the individuals are unregulated and often based overseas.

It said that a HNW investor’s high level of income or wealth, ‘does not automatically mean that someone has the experience of investing or skills to help them make investment decisions’.

To self-certify as a ‘sophisticated’ investor, investors must meet various requirements, including proving they have made more than one investment into an unlisted company in the last two years.

‘However, since the advent of investment-based crowdfunding and peer-to-peer platforms, access to these types of investments has become relatively straightforward,’ the FCA said.





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