Independent research for the FSA reveals that consumers are cynical about risk warnings and placed little attention to them.
Respondents told the regulator that they placed more confidence in advisers and were prepared to go with their judgement even if risk warnings were not understood.
But the research showed that bolder risk warnings would have to be independently reviewed to keep consumer confidence, and language would have to be adapted to cope with different consumer personalities.
The survey comes after a year-long Treasury select committee investigation into restoring confidence in long-term savings. During the sessions, MPs frequently called for a traffic light system to highlight risk on products.
The research on consumer understanding of financial risk, completed by Conquest Research, found that few respondents had the knowledge to be comfortable without a trusted adviser and consequently advisers were in a position of great power. Clients depended on advisers’ descriptions of risk to understand products.
But the consultation also showed that few consumers remembered any discussions about risk with advisers but could remember talk about product performance.
Crucially, while most consumers understood that investments could go down as well as up, many thought that small print and risk warnings were a legal explanation that product providers were duty-bound to include.
Hargreaves Lansdown investment manager Ben Yearsley is pleased that FSA risk warnings could be in for an overhaul. He says: “Nobody ever reads them or understands them and it is always up the adviser to do all the explaining. They need to be simpler and tell you how much you could lose, rather than all the technical stuff that the FSA make the providers put in.”