Analysing Risk and Understanding the FCA
Disclaimer
Prince Wealth Limited is a marketing agent for developers and other third party investment providers and whilst we endeavour to ensure the accuracy of information contained on our website, including figures and forecasts at the time of publication, Prince Wealth Limited does not guarantee or take responsibility for their accuracy. Prince Wealth Limited cannot offer financial advice and is not authorised by the Financial Conduct Authority to do so. Please be aware, that purchases of overseas properties and other overseas investments are not regulated by the Financial Conduct Authority. All investors should seek relevant advice in relation to their personal circumstances before proceeding. Prince Wealth Limited acts as a promoter and/or introducer for third parties. Authorisation from the Financial Conduct Authority is required for any advice on SIPPs. Prince Wealth Limited recommend you seek independent pension advise from FCA authorised pensions advisers. Please refer to the FCA website www.fca.org.uk for this purpose. Quoted figures are not guaranteed and are dependent upon investment performance. Past performance is not a guarantee of future performance.
Most people in the UK start from a position of believing only products that are FCA regulated are
“safe”.
That is not the case. To be clear, a product having FCA approval or being FCA regulated is
undoubtedly a good thing in that you have a reputable body to complain to if you feel you have
been misled/mis-sold etc however be clear that this does not mean you cannot lose some or all of
your money – you still can.
What the FCA offers is an assurance of certain standards being met, a high level of financial training
in FCA related areas and a route to complain and possibly seek redress if those standards are not
complied with.
One of the best examples of an FCA regulated industry is SHARES. If the company providing those shares collapses under a narrow range of circumstances you may have recourse via the FCA (mismanagement of the company for example) however if your shares simply go down, or even collapse (during a recession, for example) in price you have no recourse to the FCA at all…that is simply the RISK you take for making investments.
Realistically ALL investments carry some form of RISK. What is critically imperative is that you understand that risk, what level of fund loss could be possible and whether you can realistically afford to lose all of the money you have put into that product if the worst were to happen. If you are not comfortable with the risk, do not really understand the risk or cannot afford to lose the sum potentially at risk in a product DO NOT INVEST.
With that approach being your starting point you then have the option in the UK of “regulated” and “unregulated” investment products. It is important that you understand that “unregulated” does not mean “riskier”. It just means you need to ascertain what risk protection (if any) it offers if not that provided by the FCA.
So what is “unregulated”? Well to be clear “unregulated” means “not regulated by the FCA”, that is all. What else is unregulated/not regulated by the FCA? Well, company and occupational pension schemes for a start….they are regulated by a different agency called The Pensions Regulator.
Other investment sectors not regulated by the FCA include property investments, many types of Corporate Bond, offshore financial opportunities, gambling (that’s regulated by the Gambling Commission) and so the list goes on. The FCA only specialises in certain parts of the financial market but not all of it.
So, if oversight does not come from the FCA make sure you understand how each product is overseen/monitored/regulated and what your recourse routes are going in.
How do you do that? Well, let’s take the example of an “unregulated” asset backed Corporate Bond paying a fixed 10% per annum. If they fail to pay you, you should get your money back when the solicitors or trustees representing the Bond Holders (like you) repossesses the property asset underpinning the Bond. So in such a case you should, at the very least, research the calibre of the solicitors/trustees in place to protect you if the worst were to happen – do you believe they have the track record and reputation to deliver on this? Have they provided any written assurances themselves and so on? What is the track record of the primary Directors committing to pay this Bond. Do they have a proven track record or have they failed in the past…or maybe they have never done this before?
Let’s look at another type of investment – Currency Trading. Most people don’t have a clue how currency trading really works, have no idea what a PIP is and do not know about the various ways a currency trader can make their money (scalping, per trade fees, high water mark and so on). As such they find it very difficult to assess the risk of giving their funds to a currency trader. If that is the case the client should give deep consideration to whether they should even get involved in currency trading if they genuinely cannot think how to risk assess it. Currency trading can, of course, be risk assessed like anything else – you can ask for proof of their trading performance, you can ask for client references, you can ask for their trading risk policy, you can ask what percentage of your funds they use at any one time, you can ask what their stop/loss strategies are and so on. But also remember, just because they can provide answers does not mean the risk is reduced, just that they have a risk policy. For example, one currency trader might confirm they only risk 20% of your funds at any one time whereas another risks up to 40% of your funds….so make sure you know what losses are possible and decide what level of risk you are comfortable with. You probably won’t be surprised to know that the trader risking 40% of your funds will probably claim they can/do deliver higher returns which is obviously more appealing but they could also lose 40% of your funds in one go. So make sure you know what level of possible loss you can cope with in return for chasing higher returns.
One last comment for now, whilst the FCA only covers a small part of the overall investment market their mantra that:
Remember investments can go down as well as up in value so you could get back less than you put in.
…is a good one to remember.
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