[World Corporate Law News] FCA Warns Retail Investors On Risks In Complex ETFs

World Corporate Law News provides a weekly snapshot of corporate law developments from around the globe. Here’s a glimpse of the key corporate law update this week.

1. Securities Law

1.1 FCA highlights good practice and risks in complex ETFs for retail investors

On January 12, 2025, the Financial Conduct Authority (FCA) highlighted good practices and risks associated with complex exchange-traded products (ETPs) for retail consumers. Complex ETPs are a subset of the wider ETP market and include high-risk investment strategies that can be difficult for retail consumers to understand.

The FCA assessed how firms of different sizes and business models evaluate these products, communicate key risks and monitor outcomes under the Consumer Duty.

Given the complexity and risk profile of ETPs, it is essential that firms make sure investors have the knowledge they need to make informed investment decisions.

The FCA found that some firms demonstrated detailed processes for:

(a) Defining target markets
(b) Assessing customer knowledge
(c) Monitoring outcomes

Other firms had weaker controls or limited assessments of a customer’s investment experience and knowledge. The FCA also observed unclear disclosures, making it harder for consumers to understand the associated risks.

The FCA expects firms to put consumers first by ensuring that products and services meet their needs and that communications are clear and understandable.

ETPs include a wide range of products, from more vanilla investments to high-risk offerings. For example, crypto exchange-traded notes (cETNs), which are high-risk investments linked to cryptoassets, are a type of ETP.
Complex ETPs are high-risk investments that make up a small subset of the wider ETP market. They include products with leveraged and inverse strategies.

Complex ETPs also have features that can be difficult for retail consumers to understand, such as the potential impact of holding them beyond recommended holding periods.

What firms should do?

Firms should review their processes to ensure they meet the Consumer Duty requirements. This includes addressing gaps in appropriateness checks and clearly communicating risks to retail investors.
The review supports the FCA’s broader work to protect consumers and promote a fair and thriving investment culture in the UK.

Source – Official Guidance