A new report from the Financial Conduct Authority has a few words of warning for the finance world.
Interest rates for savers are low at the moment and they have been low for a long time. Even the most competitive Cash ISAs offer less than a 2% return on your money and the average is far lower. Savers are getting understandably frustrated by this slow return on their savings and recently many people seem to be searching for alternative ways for their cash to work harder.
The Financial Conduct Authority (FCA) recently reported that people were exposing themselves to potential losses by taking risks with their money that they may not necessarily understand.
What are the risks?
Putting some of your money into investments that carry a higher element of risk is not necessarily a bad thing. Taking greater risks usually means there are higher potential returns up for grabs.
When you are deciding how and where to put your money, one of the most important things is to assess your own attitude to risk. This will depend largely on how much of the money you can genuinely afford to lose and what your long-term goals are.
The problem with the latest news from the FCA is that people are taking many different opportunities to try and boost the return of their investments and not all of them are properly regulated. The report included warnings for savers, borrowers and investors alike. The worry is that people are committing to a savings or investment product without fully understanding the level of risk involved.
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Crowdfunding and peer-to-peer lending
Crowdfunding platforms are one of the financial products covered by the FCA’s warning. There are many well-known crowdfunding platforms which are regulated, including peer-to-peer lending and investment-based crowd-funding sites that meet the FCA’s criteria and can demonstrate that they have consumers’ interests at heart.
However, crowdfunding platforms which are donation-based, rewards-based or rely on a pre-payment system are not regulated by the FCA. That means that if you put your money into one of these options it may not be adequately protected.
Pension decisions
As of April 2015, new pension rules mean that people are able to access their retirement income as a lump sum. Although this new freedom is good news for a lot of people who may have had to choose options that were not lucrative, the FCA is concerned. They commented that there was a chance of mis-selling to pensioners and that many options offer poor value for money, particularly for people with modest pension pots.
Cyber attacks
The FCA warned that ongoing cyber-attacks on financial organisations are “inevitable” but states that “firms need to ensure that they have defences and plans in place to deal with them”. The FCA plans to focus its research on working out which firms will cause most disruption to markets and consumers if they were attacked. They will also look into how these organisations are mitigating the risks and what protocols are in place to deal with potential impacts.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Pension rules apply and tax rules may change in future. If you need help with pensions, seek independent financial advice.
A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.
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Lisa Caplan
Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.Other posts by Lisa Caplan