The recently-published report into the Risk Warnings Review talks about moving the conversation with customers away from ‘warning’ to ‘informing’. This might just seem like semantics, but could spell a significant change in the way that the industry presents investment risk going forward.
Risk is multi-faceted and of course it is important that customers understand the key risks involved in investing. What becomes apparent when we talk to customers, however, is that the way risk is currently framed can be a significant barrier. Whether you consider this to be the fault of regulators or over-zealous compliance teams (see the FCA’s clarification on the rules in December last year!), risk disclosures dominate investment journeys. Without wider context or a balanced presentation of risk and return, investing feels like a scary place for many people.
As part of the wider policy objective to encourage more people in the UK to consider investing, the Risk Warnings Review was tasked with looking at whether the approach needed an overhaul. The FCA’s behavioural research identified that the phrase ‘capital at risk’ was not effective. In our own work, it came across as legalistic and overly negative. Almost 40% of those reading the warning thought one of the main messages was ‘I may lose everything’[1].
The Wisdom Council was asked by the team conducting the Review to surface customer insights on the existing ‘capital at risk’ statement and investigate alternatives. Given that this is often the first risk warning customers see in an investment journey, it seemed a sensible place to start.
Here are some key takeaways from the evidence we submitted and which helped inform the guidance issued on 9 April. We ran an initial workshop with investors with a mix of experience to flush out key challenges, then tested new alternatives to ‘capital at risk’ via a quant survey with over 1000 respondents including investors and savers. In the quant work, we found that just 37% of savers we surveyed agreed that investing is for someone like them, with 45% considering it too risky[1].
Balance and context to risk messaging is fundamental for trust
🔸 Risk communications focus too much on the downside – and are therefore seen as a potential barrier to new investors (regardless of age). As one investor put it: “long term, there is a high degree of success”.
🔸 The FCA want to see ‘a balanced explanation of risk and reward’. When we tested alternatives, it was seen as critically important to have this sense of balance. It lent credibility to any statements and reinforced trust that manufacturers were being honest about potential risks.
🔸 The concept of investing has been stretched more thinly as the landscape evolves and now firmly includes crypto, but to let property, etc. This perception is reinforced by crypto providers advertising on ‘investing’ sections of financial websites. Engaging audiences with clear messages about risks and the importance of taking a long-term view of ‘traditional’ investing is absolutely key.
🔸Associations with cash are still mostly ‘safe’ – it tends to be older investors who grasp the threat that inflation can pose to future buying power.
🔸‘Capital’ is hard to define and acts as an immediate blocker for some – it feels like an old-fashioned word or something related to business [for example, capital investment, start-up capital], not something targeted at retail consumers. All of the alternatives to ‘capital at risk’ were seen as more consumer friendly with savers more likely to prefer consumer friendly[1], balanced copy.
🔸Context was critical – point to outcomes and set realistic expectations. While there is a minority of customers who see time horizons in risk statements as a ‘fixed term’ or ‘lock-in period’ for an investment, most welcome an indication of how long they should consider investing and a reminder that this is a long-term asset.
🔸Experienced investors we talked to also flagged that losses/gains in a fund are heavily dependent on when you move in and out of markets. So caveats need to be sufficiently flexible to reflect this.
Remembering that all of this needs to be approached in the context of Consumer Understanding:
🔹 Less is more, avoid vague language – be succinct
🔹 The most accessible phrases were clear, easy to understand and adopted a more customer-centric perspective. For example, talking about ‘your money’ instead of capital.
As consumers move through the investment journey, it is important to reinforce and round out opening statements
Education and explanation should be designed to reassure, maintain balance and counter misconceptions:
Explain that their money is not locked in or inaccessible (depending on the product) – almost 20% of respondents thought any mention of a time horizon was an implied ‘term’ or lock in period[1].
Consider a comparison against cash if relevant for the investment product or the target audience
Offer up simple proof points to validate key messages
A few words from us on cohorts
🔹 From our research, we know that there were some differences in how cohorts reacted to the statements and which messages resonated most – for example, the use of the word ‘remember’ was seen by some as a helpful nudge, for others it was patronising.
🔹 Understanding more about customer cohorts can ensure more effective journey design and is, rightly, a focus for the FCA when it comes to consumer understanding best practice.
A change in mindset and a commitment to clarity
Moving away from talking about ‘risk warnings’ to ‘risk information’ might feel as though it is a cosmetic change, but for us it signals a change in mindset. That has to go hand in hand with a commitment to communicate both the pros and cons of investing effectively with customers – a responsibility that has been clearly set out under Consumer Duty. With the right balance, engaging content and supportive investment journeys, informing customers about risk should add to their overall understanding of the investing landscape and the role that investing can play in delivering better outcomes.
You can read TWCs report to the Review here.
Get in touch if you’d like to hear more about getting the mix right for your customers.
[1] Source: Wisdom Council Research Alternatives to CAR
Written by
Dawn Houghton
Head of Investor Governance
Dawn is a senior consultant to The Wisdom Council and leads our work on investor and fund governance – challenging the industry to ‘think customer…
