Ditch ‘alarming’ risk warnings to spur UK retail investment, fund managers told

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Asset managers have been urged to drop “boilerplate” risk warnings in favour of more balanced explanations of the pros and cons of investing, as the UK government seeks to encourage Britons to be more ambitious with their savings.

Repeatedly telling consumers their “capital is at risk” and they could lose money in financial markets has driven UK households to invest the lowest share of their wealth in equities of any G7 country, according to a new report commissioned by chancellor Rachel Reeves.

The risk warnings review, published on Thursday, told fund managers to provide customers with “simple, accessible explanations of how investments can rise and fall, presented alongside relevant benefits and explicit time horizons”.

Backed by the UK Treasury and financial regulator, the report is part of broader efforts to foster a stronger investment culture, including cutting the annual allowance for tax-free cash Isa savings accounts and loosening rules on financial advice and guidance.

Chris Cummings, head of the Investment Association trade body which chaired the review, said: “Efforts to protect consumers have, over time, undermined good long-term outcomes for financial well-being and resilience.”

City minister Lucy Rigby said in a preface to the report: “This is a concrete example of where a culture of too much risk aversion is harming household finances, and it must change.”

Several of the biggest UK fund managers have already adopted a more balanced approach to informing consumers about the risks of their products. This has increased take-up of investment products and share ownership among some customers.

Asset manager Vanguard said a recent UK trial using more “human, educational and balanced” risk disclosures instead of traditional ones seen as “abrupt, fear-inducing and highly technical” reduced the drop-off rate in Isa account opening by 23 per cent.

“Traditional language on risk has often had the opposite of its intended effect,” said Liz Waldron, Vanguard Europe’s head of product and client experience. “Rather than helping people make better decisions, it tends to put them off altogether.”

Hargreaves Lansdown, the UK’s largest DIY investment site, found using more balanced messages on risk led to an 8.7 per cent higher opening rate for stocks-and-shares Isas while increasing customers’ equity allocations by 3.8 per cent. 

The report, commissioned last year by Reeves as part of her “Leeds Reforms” to ease financial regulation, outlined several immediate changes investment firms can make under existing rules and recommended other “structural issues” requiring regulatory reform.

Recent research “indicates that ‘capital at risk’ is often ignored in advertising contexts and can be actively alarming for those furthest from investing, who tend to have a more emotive response to risk”, the report said.

It called for the Financial Conduct Authority to rework its financial promotion rules to support “clear, contextual explanation of how investment risk operates” and to change its principle of standalone compliance that requires each document to comply with rules on risk disclosure.

The FCA published a clarification of its rules in December to address “common misconceptions about risk warnings”. It also said last month that it would launch a review of its financial promotions rules this year, which will examine issues raised by the report published on Thursday.

“Too often risk warnings to potential investors have been driven by what firms think our rules say and established expectations that have built up over time, rather than what works for the intended reader,” Sarah Pritchard, deputy chief executive of the FCA, said in a preface to the report.