On 4 December 2023, the FCA published a new webpage setting out its expectations under the Consumer Duty for firms offering fractional shares to retail investors.
The publication follows HM Treasury’s recent announcement of its plan to allow certain fractional share contracts as ISA investments and engagement with stakeholders on implementing this. The FCA notes that this provides an opportunity to clarify its expectations of firms offering fractional shares to a retail market under the Consumer Duty, and to set out its next steps in this area.
The FCA flags that investment in fractional shares represents a significant and growing part of the consumer investment market in the UK. Fractional shares allow consumers to invest in listed shares at a price point that fits their needs, where the price of a full share may be unaffordable. This allows more consumers to participate in a market and may also enable them to diversify their investment portfolio. The FCA wants to ensure that consumers receive the right information and benefit from appropriate protections when deciding whether to invest in fractional shares.
In relation to the Consumer Duty, the FCA reminds firms offering fractional shares that they must act in good faith, avoid causing foreseeable harm, and enable and support consumers to pursue their financial objectives. Firms should carefully consider whether their fractional share offerings are delivering good outcomes for consumers, in line with the Consumer Duty.
The webpage sets out some characteristics of fractional share models that firms should consider that may impact consumer outcomes, which include:
- Any limits on transferability (i.e., where the consumer cannot transfer their investment to another firm) or the consumer’s ability to trade fractional shares.
- When fractional share trades will be executed including whether the firm aggregates share orders to whole shares in order to fulfil trades and how this may affect the price for consumers.
- What fees and charges consumers will incur, including foreign exchange conversion charges or other fees impacted by trading in shares issued by companies outside the UK.
- Whether consumers understand if they will have voting rights or other shareholder rights based on their holdings and how these rights can be exercised.
- Whether consumers understand if they will receive dividend income based on their holdings and how this is calculated.
- Whether consumers understand their ownership rights to their fractional share holdings, including how investments may be recovered in the event of a firm failure.
These characteristics should be considered alongside the FCA’s more detailed expectations for firms under the Consumer Duty as set out on the webpage.
In terms of next steps, the FCA plans to work closely with HM Treasury and HMRC as they develop their proposal to allow certain fractional shares contracts as eligible ISA investments. The FCA will consider and appropriately communicate the regulatory treatment of fractional shares and whether the rules that currently apply are proportionate. In the meantime, it notes that it expects firms to review their practices in line with the information set out on the new webpage to ensure they comply with the Consumer Duty.