Under the British proposal, the Financial Conduct Authority (FCA) said the current ‘risk warnings’ on investments are often ignored by consumers, floating the idea of an education program to better educate investors prior to investing.
In a statement issued last week, the FCA said it is concerned that too often consumers are investing in investments they don’t understand, such as "speculative mini-bonds", which can lead to significant and unexpected losses.
The regulator also highlighted other investments defined as potentially high-risk include investment-based crowdfunding and peer-to-peer lending.
The governing body warned that many financial adverts and websites carry warnings along the lines of “your capital is at risk”, but the FCA said these were often perceived as “white noise” by many investors.
While highlighting they did not wish to comment on a specific proposal made by another regulator, ASIC told nestegg that, in general, they urge investors to do their research before buying.
“No investment is risk-free, and any investment should include a proper consideration of the risk/reward balance,” an ASIC spokesperson said.
The corporate regulator also said improving investors’ knowledge and skills is a "clearly desirable outcome".
“There are many education programs available, and ASIC’s MoneySmart provides important general advice on managing budgets, avoiding scams and being in control of your personal financial situation: these are all important considerations that should be factored into those investment decisions,” ASIC's spokesperson continued.
'Properly designed training program could be beneficial'
However, RMIT’s senior lecturer of finance, Dr Angel Zhong, told nestegg that a properly designed training program could be beneficial for Australians who want to improve their financial literacy prior to investing.
“Programs aiming at training inexperienced investors would help, if they are properly designed and are able to attract interest,” she said.
“Financial research shows retail investors on average lose money in the market and are more easily influenced by unmoderated financial advice online. Training/educational programs would reduce these impacts.”
However, she pointed out that if programs were made compulsory, they could discourage shareholder participation, which is a vital part of the economy.
“Overconfidence is a classic behavioral finance bias. If behavioural biases in investment are covered in training, this could further improve financial wellbeing of sharemarket participants. That’s why I spoke about the need for a properly designed training program,” Dr Zhong concluded.
