New FCA rules set to strengthen financial promotion rules for high-risk investments
Posted on 17 Aug 2022
On 1st August 2022, the FCA laid out its finalised amendments to the financial promotions rules which will seek to mitigate the potential for firms to inappropriately market high-risk investments to consumers.
These changes come in response to the greater volumes of retail investments and so-called “self-directing” (non-advised) investors that has persisted over the last few years which has resulted in a greater number of consumers becoming increasingly responsible for their own investment decisions.
Such amendments show support of the FCA’s overall approach to their new Consumer Duty rules which has set the objectives of improving the protections of retail consumers and enabling consumers to make more informed financial decisions.
The key changes which are set to come into effect in 3 months’ time includes:
- The simplification of the FCA’s existing marketing restrictions on high-risk products through the implementation of categories for investments products based upon their risks.
- Improvements to the consumer journey into high-risk investments, including risk warnings, banning inducements, and improving client categorisation and appropriateness tests.
- Strengthening the roles of firms approving and communicating financial promotions.
Under the financial promotion rules, investment products of similar characteristics will be designated under the 3 new categories laid out below. This simplification of the current rules intends to improve the ease at which firms can determine the correct marketing restrictions for investments products (particularly those that are high risk) and ensure that the mass marketing of high risk products to retail consumers is not engaged in.
These categories and the corresponding marketing restrictions are laid out below:
|Readily realisable Securities (RRS)||Including exchange traded securities such as shares traded on the London Stock exchange||No marketing restrictions|
|Restricted Mass Market Investments (RMMI)||Including non-readily realisable securities (NRRS) (e.g. unlisted securities) and Peer-to-peer agreement. This category will later include Crypto assets following the implementation of the FCA’s final rules for crypto assets||Mass marketing allowed to retail investors - subject to certain restrictions|
|Non-Mass Market Investments (NMMI)||
Non- Mainstream Pooled Investments (NMPI), including:
- unregulated collective investment schemes (UCIS)
- qualified investor scheme (QIS)
- a unit in a long‑term asset fund (LTAF)
- certain securities issued by special purpose vehicles
- traded life policy investment
|Mass marketing banned to retail investors|
Protections throughout the consumer journey into investments
To strengthen the clarity of risk warnings directed at retail customers which appear at the start of the consumers journey, the FCA will be introducing several standardised risk warning formats which must be prominently displayed in the promotion of RMMIs and NMMIs.
For the majority of RMMIs and NMMIs, excluding P2P agreements and portfolios and where the provision/issuance of the investment could give rise to an FSCS claim, the set format to be used will be as follows:
For P2P agreements and portfolios, and where the provision/issuance of the investment could give rise to an FSCS claim, the FCA has specified alternative formats and guidance which should be followed.
A key feature of this standard approach will be the inclusion of a link to a 2 minute “risk summary” about the specific product being promoted. Although firms are expected to base their summaries upon the standardised formats, the FCA will expect firms to tailor such summaries for each investment product where the standard format would fail to provide the consumer with a clear and comprehensive overview of the associated risks.
The FCA will likewise be introducing a standardised digital risk warning pop-up which firms must generate for first time consumers visiting their websites, ensuring that there will be numerous moments throughout the consumer journey where the risks of investments are raised.
Monetary and non-monetary inducements, such as “refer a friend” or new joiner bonuses, will be fully prohibited under the new rules for the promotion of NMMIs. Such benefits are stated by the FCA to risk incentivising investments into products which consumers might otherwise deem too high-risk.
The new rules shall see the introduction of a mandatory 24-hour cool-down period from the moment the retail client requests to view the financial promotion (for NMMI) or “Direct Offer Financial Promotion” (for RMMI - which broadly encompasses those financial promotions which provide a path to invest e.g. a buy now button or application form). This rule will provide consumers with sufficient time to consider if the investment is suitable for them and prevent impulsive investments into products outside their risk-appetite. Notably, however, firms will be able to continue with usual client onboarding procedures during this cool-off period.
Appropriateness tests have also been a focal point in the bid to strengthen consumer protection, which have received several new rules and guidance to ensure RMMI products that are unsuitable for a particular consumer will be flagged and prevented from solicitation. Likewise, prospective clients will be obliged to provide further evidence for certain criteria which will affect their categorisations, such as net-worth, to help ensure they are treated appropriately.
Finally, the FCA will be enhancing the responsibilities of firms approving financial promotions (s21 approvers) of all investment products, obliging these firms to take a more active role in monitoring their approved promotions over time. This will include a responsibility to collect quarterly attestations from clients that the promotion has remained unchanged, or that a re-assessment is required, and the for the assessment of their client’s appropriateness tests periodically.
Furthermore, financial promotions which have received approval must display the name of the approving firm and date at which the approval was granted, improving the transparency for prospective investors. Lastly, s21 approver firms will be obliged to conduct self-assessments of their competence to approve or communicate financial promotions depending on the product in question, preventing the approval of promotions by approved persons who may lack the expertise to adequately identify the risk involved.
Those rules relating to the main risk warnings for financial promotions of high-risk investments (not including pop-up risk warnings) will come into effect from 1 December 2022, with the remaining set of rules relating to the consumer journey and the approvals of financial promotions having effect from 1 February 2023.
Firms operating in the crypto asset sector have also been warned of these changes, though will remain outside the scope of these rules until crypto-assets are brought within the financial promotions regime following the finalisation of the crypto-assets legislation by the treasury.