PFS urges industry to ensure Innovative Finance ISAs do not exploit behavioural biases

Product providers, financial advisers and the FCA are being urged by the Personal Finance Society (PFS) to ensure that Innovative Finance ISAs are designed and promoted in a way that won’t exploit behavioural biases.

PFS CEO Keith Richards said: “Innovative Finance ISAs pose a very old problem – products that promise high, very specific returns but leave capital at risk.

“People register the high return, but don’t read the warnings about capital at risk. The same was true of split capital investment trusts and precipice bonds in the 2000s. Because people see an interest rate in the same format as a deposit account, they don’t realise that their capital is not protected by the Financial Services Compensation Scheme in the same way a deposit account would be.

“Behavioural bias tends to mean that the markets reward poor behaviour in the short term, but signposting consumers towards professional advisers is a powerful way to combat this.”

Last week, FCA chair Charles Randell, stated in the wake of the failure of London Capital & Finance, the Innovative Finance ISA policy was being reviewed.

Randell said it was important to ensure that any reviews in this area – including HM Treasury’s own review of minibond policy – take a broad view, to prevent the skimmers and scammers from resurfacing in some other part of the landscape.

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