The FCA has been reviewing the ease and speed with which people can make high-risk investments by proposing a significant strengthening of its rules on how high-risk financial products are marketed to reduce the number of people who are investing in high-risk products that are not aligned to their needs.
This risk being further exacerbated by the evolving investment environment with promotions distributed to a mass audience at increasing speed via online platforms and through social media. During the COVID‑19 pandemic, the UK FCA noted a rapid growth in the proportion of consumers holding high‑risk investments, driven by social and emotional factors rather than fully understanding the risks involved, making them particularly vulnerable to unexpected losses.
Managing this risk presents significant challenges given the limited powers the FCA may have over many issuers of high‑risk investments, where they are not carrying out a regulated activity and therefore not authorised, leaving the financial promotions regime the only mechanism to protect consumers. Under the proposed rules, the FCA would ensure firms that approve and communicate financial marketing have relevant expertise and understanding of the investments being offered, including examining the risks associated with self-certification by consumers.
The consultation sets out proposals for:
- classification of high-risk investments
- consumer journey into high-risk investments
- strengthen the role of firms approving and communicating financial promotions
- apply financial promotion rules to qualifying crypto assets.
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Who this applies to
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Of interest to: |
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The FCA is proposing changes and clarifications to the financial promotions regime that will seek to address the risks posed to consumers.
The financial promotions regime consists of three core elements
- Section 21 (s21) of the Financial Services and Markets Act 2000 (FSMA) which sets out ‘the financial promotion restriction’. This prohibits the communication of a financial promotion unless it is communicated or approved by an authorised person.
- The FSMA (Financial Promotion) Order 2005 (FPO) which includes a number of exemptions from the financial promotion restriction. These permit an unauthorised person to communicate a financial promotion in certain circumstances and subject to certain conditions.
- FCA Handbook rules prescribe the requirements relating to financial promotions that apply to authorised firms when they communicate or approve them (financial promotion rules).
The proposals seek to enhance these requirements, including prescribing further obligations on those that approve financial promotions under Section 21 in respect of high-risk investments, with further guidance on rationalization of the types of high-risk investments.
High Level Summary of the proposals
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Summary of proposed change
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High‑risk investments |
Investments which are subject to marketing restrictions under FCA rules including: · investment based‑crowdfunding (IBCF), · peer‑to‑peer (P2P) agreements, · other non‑readily realizable securities (NRRSs), · non‑mainstream pooled investments (NMPIs) and · speculative illiquid securities (SISs).
Qualifying crypto assets will also fall within the regime, subject to amendments to the financial promotions regime.
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Qualifying Crypto assets |
Proposals are to categorize ‘Qualifying Crypto Assets’ as ‘Restricted Mass Market Investments’. Consequently, consumers would only be able to respond to crypto asset financial promotions if they are classed as restricted, high net worth or sophisticated investors.
FCA would not propose that it should be possible for ‘Direct Offer’ Financial Promotions of qualifying crypto assets to be made to self‑certified sophisticated investors
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Restricted Mass Market & Non-Mass Market Investments
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The FCA will rationalize the rules in COBS 4 relating to ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments into the following broad categories:
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Approval of financial promotions for unauthorized firms |
The FCA proposes a ‘Competence & Expertise’ requirement where a financial promotion for investment business is issued by an un-authorised person which has been approved by an authorised firm. Further develop a robust regime to complement the proposed s21 gateway ensuring approving firms have the relevant expertise in the promotions they approve and the overall quality of financial promotions in the market is high.
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Proposals to ensure consumers only access investments with sufficient knowledge |
· strengthening risk warnings · banning inducements to invest · introducing positive frictions · improving client categorization and · stronger appropriateness tests · strengthen the role of firms approving and communicating financial promotions
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Ban inducements to invest |
The FCA proposes to ban financial promotions for high‑risk investments from containing any monetary and non‑monetary benefits that incentivize investment activity, including such incentives paid in crypto assets. This is modelled on a similar ban that applies to the marketing and distribution of Contracts for Difference.
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Self-Certification |
The FCA noted that risk of consumers incorrectly self‑certifying themselves as high net worth or sophisticated and do not understand the impact of their categorization.
The FCA proposes to change the investor declaration form for ‘restricted’, ‘high net worth’ and ‘sophisticated’ investors and to introduce an ‘evidence declaration’ where consumers will be required to state why they meet the relevant criteria.
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Appropriateness Assessments |
Proposal to introduce guidance on the types of question to be covered by appropriateness assessments for all other ‘Restricted Mass Market Investments’ in relation to Direct Offer Financial Promotions.
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Firms communicating or approving ‘Direct Offer’ Financial Promotions will need to ensure clients are both categorized appropriately and an appropriateness test is undertaken, including when the Direct Offer Financial Promotions are marketed to existing customers wanting to engage in further investment activity. Crypto assets are not currently subject to the financial promotion regime, it is unlikely that customers will yet have been categorised or passed an appropriateness test set by a firm marketing crypto assets, which will need to be considered in due course.
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Approval of Financial Promotions
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· The current requirements to name the firm that is approving the financial promotions lacks clarity, and further clarification is proposed by the FCA in addition to requiring the financial promotion clearly states on its face the date on which it was approved.
· The FCA proposes to require approvers to self‑assess whether they have the necessary competence and expertise (C&E) in an investment product or service before approving or communicating a relevant financial promotion.
In its self‑assessment of C&E, the FCA proposes that a firm considers: • whether it has the relevant experience and/or qualifications in the sector to which the financial promotion relates • the previous employment history and qualifications of the individuals responsible for approving promotions and whether they align with the product and sector of the promotion.
Where a Firm lacks the relevant C&E: • Decline to approve the relevant financial promotion • Where it has originated the promotion, another authorised person should confirm the financial promotion complies with the FCA rules before it is communicated to consumers. |
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Continuing Compliance of approved financial promotions |
The FCA is reviewing the continuing compliance of approved promotions to consider whether there is sufficient consideration and ongoing compliance with the financial promotions’ requirements, including:
• if there have been any changes to the promotion, which means it is no longer being lawfully communicated. • if there have been any changes which may affect whether the promotion continues to be clear, fair and not misleading, including consideration of the ongoing commercial viability of the proposition described in the promotion. • Funds raised are being used for the purposes described in the promotion. • The promotion complies with any new regulatory requirements that may come into force from time to time.
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Attestations of ‘no material change’
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The FCA is also proposing to require approvers to collect attestations of ‘no material change’ from clients with approved promotions every 3 months, and for the lifetime of the approved promotion
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Ongoing assessment of appropriateness tests.
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The FCA proposes a new requirement on s21 approvers to check compliance of appropriateness tests periodically, throughout the lifetime of a promotion. |
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Preliminary suitability assessments |
The FCA seeks to provide further guidance and reiterate that firms approving financial promotions for ‘Non‑Mass Market Investments’ must undertake a preliminary assessment of suitability before a firm can make a promotion to high‑net worth or sophisticated investors. This should be based on the client’s profile and objectives.
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Prescribed Responsibilities (PR) under SM&CR
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The FCA, will in due course, consider whether the C&E should be incorporated into the SM&CR by, for example, introducing a new PR as part of their broader review of the SM&CR in the future. |
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Miscellaneous |
LTAF can only be marketed to professional, sophisticated and high net worth investors. Later in the year, the FCA will consult on allowing a broader range of retail investors to invest in LTAFs in a controlled way.
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The consultation period ends 23 March 2022.
