HM Treasury's proposals to allow wider promotion of investment in unlisted securities could cause far more problems than it solves, said the Financial Services Consumer Panel today in its response to Treasury Consultation¹.

The Consumer Panel has pointed out that the proposed changes would mean that consumers who define themselves as high net worth and sophisticated investors could invest in unlisted companies without any regulated advice, and so could lose their money and not have any comeback through the Financial Ombudsman Service or Financial Services Compensation Scheme.

Whilst there will be high net worth and sophisticated investors who are competent to take these decisions and to deal with anything which may go wrong, there are others who will not be in this position. For example, given current property values in some parts of the UK, it is quite possible for an individual inheriting his or her parents' former home to meet the definition of high net worth investor (having net assets worth at least £250,000) without acquiring any financial or investment expertise.

For a "sophisticated" investor, the Treasury's proposal to allow self-certification rather than having to go through a regulated financial adviser or firm, also opens up huge possibilities of mis-selling without any recourse to compensation. It means that a person selling an investment in an unlisted equity could at the same time persuade a person to sign a self certification form, so agreeing they were a sophisticated investor and signing away all their rights in the excitement of an "exclusive" investment opportunity. The costs to the consumer of being wrongly identified as a sophisticated investor are high. So the Panel does not believe that there is any scope for relaxing the existing requirements for certification of sophisticated investors.

The Consumer Panel points out that the consultation paper focuses on the demand from business for business angels. At no point does it consider the possible risks for consumers, or show any evidence of the demand for this from consumers. The Panel believes that the possibility of more consumers being mis-sold means that no changes should be made to the current rules on financial promotion in this area.

Ann Foster, Chairman of the Panel said:

"The consumer protection in the current financial promotion regime for investment in unlisted securities should not be watered down in this way for the benefit of the few, but to the likely detriment of many."