Many investors perceive risk warnings as “white noise” and often the genuine possibility of losing money does not sink in, according to the City regulator.
The Financial Conduct Authority (FCA) has suggested investors may be required to demonstrate they have enough knowledge about financial products, by passing an online test or watching an educational video.
It made the comments as it released a discussion paper with proposals to strengthen rules around high-risk investments and help people to avoid losing money from inappropriate schemes.
Research by the Financial Services Compensation Scheme (FSCS) found one in five retirees has considered riskier investment and pensions products in the search for higher rates of interest.
A prolonged low interest rate environment may have made it more tempting for some people to consider riskier investments.
The impacts of the pandemic and advances in technology which have increased the availability of products have resulted in more consumers using high-risk investments, the FCA said.
Its Financial Lives data suggests 6% of UK adults with investments have increased their high-risk holdings during the pandemic.
Feedback to the discussion paper will help shape rules the FCA plans to consult on this year.
It is considering what improvements could be made to risk warnings, which were often perceived as “white noise” to many investors and often did not convey the genuine possibility of an investment loss.
Other suggestions in the paper include requiring consumers to watch educational videos or pass an online test. This could help prevent consumers from simply clicking through and accessing high-risk investments they do not understand.
The FCA is also seeking views on whether more types of investments should be subject to marketing restrictions and what restrictions should apply, for example for peer-to-peer agreements.
More than four in 10 (45%) non-advised investors did not view losing some money as a potential risk of investing.
Sheldon Mills, FCA executive director of consumers and competition, said: “We have been clear that we want to deliver a consumer investment market that works well for the millions of people who stand to benefit from it.
“We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses.”
Mr Mills added: “We have already taken action by banning the mass-marketing of speculative mini-bonds.
“We continue to address harm in this market through our ongoing supervisory and enforcement action, but recognise more needs to be done.
“Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don’t meet their needs.”
The FCA is inviting feedback on its discussion paper by July 1.
The regulator said it wanted to understand how to strike the right balance between protecting consumers and consumers taking responsibility for their own actions, and identifying any unintended consequences of the changes.