The hidden drawbacks of the FCA’s high net worth rules

1st May 2019 3535 - Blog Posts

Since 2013, the FCA have imposed strict regulations on the marketing of non-mainstream pooled investments (NMPI), which includes unregulated investment schemes and close substitutes.

The regulator recently extended these requirements to non-readily realisable securities (NRRS) including things like equity crowdfunding, which has caused some controversy. The FCA has also added extra requirements, including the necessity for firms ‘to take reasonable steps to ascertain’ that the investor is high net worth or a sophisticated enough investor for that instrument even when they have self-certified.

The essence of the high net worth rules

The full rules about marketing are set out by the FCA in COBS 4.12. They state that the marketing of NMPI should be restricted to high-net worth investors, generally those with an income of over £100,000 or assets of over £250,000, or sophisticated investors who self-certify that they have extensive knowledge, experience or expertise. But where these criteria were previously identified through investor self-certification, now the onus is on firms to take steps to prove that they apply before they undertake any marketing.

Do the rules lack clarity and consistency?

One point of contention is what will be classified as NRRS – the emphasis lately has been on crowdfunding platforms and peer-to-peer investments, which the FCA has confirmed should fall under the regulations. This has received criticism from the crowdfunding and peer-to-peer lending sectors who say that asking an investor for evidence of income before showing them a proposition will mean the exemption has limited use. Investors are also required to self-certify as HNWI if they want to invest more than 10% of their net assets in that asset class but there is no requirement for firms to police this, which has also attracted criticism. The FCA says it has specifically highlighted peer to peer lending and crowdfunding platforms because it fears that a rise in interest rates could trigger a spate of defaults on many of the high-risk loans that P2P lending websites facilitate. Peer to peer lenders have hit back at this claim though saying that there is fear and lack of understanding around the sector because it is so new.

Ultimately, the change in the high net worth rules may be implemented across all asset classes, which would add some consistency but currently the regulation seems to have been selectively applied which could lead to disparity and a lack of clarity.

Andrew Frost Executive Director - Lawson Conner

Andrew Frost

Executive Director


D: +44 (0) 203 696 2568