FCA: 44% Think AI Investing Answers Are Regulated

Three things from the regulator this week, and they join up. Young investors are leaning on AI without understanding what it is, the FCA reissued its warning on unregulated loan notes after another failure, and a discretionary manager went into administration on Monday. All three come back to the same question: who is actually on the hook if this goes wrong.

Four in five newer investors have used AI, and a third expect compensation if it misleads them

The FCA published research on 27 August covering 18 to 40 year olds who own or are considering investments. Four in five had used AI for help with investing, and around two-thirds do so occasionally or regularly. Fifty-six per cent said they trust AI tools, ahead of television and radio at 47 per cent, the press at 46 per cent and social media influencers at 29 per cent. Two-thirds expect to use it more over the next year.

The gaps are in what people think they are getting. Forty-four per cent mistakenly believe AI-generated financial information is regulated. Thirty-eight per cent think it is fine to make an investment decision solely on an AI’s output. Thirty-two per cent wrongly believe they could claim from the Financial Services Compensation Scheme or the Financial Ombudsman Service if AI advice went wrong. General purpose chatbots are not regulated by the FCA; a tool built specifically to give financial advice probably would be.

“AI can help you research companies, understand jargon or explore options before you make a decision,” said Lucy Castledine, the FCA’s director of consumer investments. “But you need to understand how you’re protected and continue to use your own judgement.”

There is a more encouraging finding in the same research: 73 per cent know AI can be inaccurate and 86 per cent understand the need to check the sources it cites. That is the whole defence, and it is worth applying literally. Ask where a figure came from, then go and read that source. A chatbot summarising a fund’s charges is doing something useful; a chatbot telling you which fund to buy is doing something you have no recourse over. If you want to check what a fund actually costs, fund fees and the OCF explained shows you where to look on the factsheet, and common investing mistakes covers the decisions that do most of the damage. The research is at the FCA.

The FCA warned again on mini-bonds and loan notes after another litigation funder failed

On 20 August the FCA warned consumers about loan notes and mini-bonds issued by unregulated companies, pointing to the failure of Woodville Consultants Ltd, a litigation funder that raised money from retail investors through unregulated loan notes.

The structure is simple and that is the problem: you lend a company money for a fixed period in return for interest, and if the company fails you can lose everything. The FCA permanently banned marketing speculative illiquid securities to retail investors from 1 January 2021, yet the adverts keep appearing on social media and search. The warning signs it lists are worth memorising: pressure to act quickly, no clear explanation of how you could lose money, an “asset-backed” claim with no evidence of what the asset is, being encouraged to certify yourself as a sophisticated or high-net-worth investor so the promotion becomes legal, and unregulated introducers taking a fee out of your money before it is even invested.

“Big, fixed returns are a warning sign, not a guarantee,” said Castledine. The FCA has issued more than 1,200 warnings so far this year.

The uncomfortable part for anyone who thinks this could not be them: these are not obvious scams with bad spelling. They are pitched as the boring, predictable alternative to the stock market, which is precisely what a nervous investor wants to hear. A fixed 10 per cent from an unlisted company is not a bond substitute; it is venture capital risk with none of the upside. If you are choosing where cash should sit, cash ISA versus stocks and shares ISA is the comparison that matters. The warning is at the FCA.

EGR Wealth entered administration on 24 August

The FCA confirmed on 26 August that EGR Wealth Limited, a discretionary investment manager, entered administration on 24 August, with Robert Goodhew and Geoff Bouchier of Kroll Advisory appointed joint administrators. The firm had agreed to a voluntary requirement restricting its activities a month earlier, on 24 July.

The detail worth understanding, because it is the same detail most people get wrong about platform risk, is that EGR Wealth does not hold client money or custody assets. Those sit with a separate regulated firm under the FCA’s client asset rules, which exist to keep your investments intact if the firm managing them fails. The manager failing and the custodian failing are different events with different consequences, and the first is far more common.

The FCA’s practical advice to affected customers is to keep contact details current with the administrators and, importantly, to decide which firm should manage the investments in future, because money left unmanaged can underperform while everyone waits. That is the general lesson too: knowing who holds your assets, as opposed to who chooses them, is the thing to check before you need to know. Our guide to UK investment platforms covers how those arrangements are disclosed. The notice is at the FCA.