FCA final rules challenge financial promotions of high-risk investments

What do the new rules say?

The FCA has confirmed that it will implement the following changes (as stipulated in the January consultation) to the financial promotions rules (subject to any targeted changes set out below):

1. Introduce the categories of Restricted Mass Market Investments (RMMI) and Non Mass Market Investments (NMMI) for financial promotions;
2. Introduce stronger risk warnings for all RMMIs and NMMIs;
3. Ban inducements to invest e.g., ‘refer a friend’ bonuses for RMMIs and NMMIs;
4. Introduce personalised risk warning pop ups for first time investors in RMMIs and NMMIs;
5. Introduce a 24-hour cooling off period for first time investors in RMMIs and NMMIs;
6. Change the investor declaration form for ‘restricted’, ‘high net worth’ and ‘sophisticated’ investors to introduce an ‘evidence declaration’ and simplify the declaration;
7. Make changes to the rules on appropriateness to ensure that all investors in RMMIs pass a robust assessment of their knowledge and experience;
8. Introduce record keeping requirements for firms to monitor the outcome of the consumer journey for RMMIs and NMMIs;
9. Implement specific consumer journey proposals for investments already subject to financial promotions rules;
10. Strengthen the role of authorised firms communicating and approving financial promotions including clarifying the name of the s21 approver and including the date of approval of a financial promotion;
11. Require s21 approvers to have a level of competence and expertise with respect to the financial promotions that are being issued;
12. Introduce a new ongoing monitoring requirement for s21 approvers for the life of the promotion, including requirements to obtain attestations of no material change from clients;
13. Extend conflicts of interest requirements to s21 approvers;
14. Require s21 approvers of RMMIs to take reasonable steps to ensure that the relevant processes for appropriateness tests comply with FCA rules on an ongoing basis; and
15. Implement specific FCA non-handbook Guidance regarding varying aspects of the financial promotions rules.

What are the targeted changes from the January consultation?

With respect to the above, the FCA is making several targeted changes to its final rules (from those published in the January consultation) in response to the feedback received.

In summary, changes include:

1. Investments issued by local authorities will be, where necessary, expressly exempt from the FCA’s marketing restrictions.
2. Risk warnings and associated risk summaries. The FCA will shorten its main risk warning for high-risk investments and allow alternative risk warnings in (i) P2P agreements and portfolios; and (ii) where the activity of the product issuer or provider could be covered by the Financial Services Compensation Scheme. Regarding risk summaries, rules will allow firms to vary from their prescribed summary if they have good reason. Equally, firms can include any key investment risks that are not covered by the template. Any divergence from the template, and rationale for such, must be recorded. The risk summary must be accurate and stay up to date with market developments and business model changes.
3. Incentives to invest. The FCA will exempt “shareholder benefits” from the ban. For example, discounted products or services produced or provided by the firm receiving the proceeds of the investment, from the ban on incentives to invest.
4. Direct Offer Financial Promotion (DOFP) rules relate to promotions which include a manner of response or includes a form by which any response may be made. The FCA has stated that they should not limit the information firms can otherwise provide about the investment. The FCA will provide greater clarity on how firms can comply with the DOFP and consumer journey rules.
5. The cooling off period of 24-hours will start from when the consumer requests to view the DOFP (for RMMIs) or financial promotion (for NMMIs). Firms will not be able to show consumers the relevant financial promotion until at least 24-hours has passed but can proceed with other parts of the consumer journey, such as KYC/AML checks. If these processes take more than 24-hours to complete, firms will not need to introduce an additional pause in the consumer journey, but the consumer must give their active consent that they wish to proceed with the investment.
6. Client categorisation. The FCA will clarify that where consumers must provide their income/ net assets to show they are high-net-worth they can provide these to the nearest £10,000/£100,000 respectively. The FCA will also clarify what level of checks firms are expected to conduct on the information provided by the consumer in the investor declaration.
7. Appropriateness assessment. The rules will be modified so that consumers must wait at least 24 hours before undertaking the appropriateness test again from their second assessment onwards.
8. Only the requirements to record the metrics relating to client categorisation and the appropriateness assessment will be introduced. Other metrics proposed should be considered by regulated firms when considering their monitoring obligations under the Consumer Duty rules and guidance, including the consumer understanding outcome.
9. The implementation period will be extended to six months. Main risk warning rules (risk warning and risk summary, but not the personalised risk warning) must be implemented within four months.
10. An alternative format for the date and time stamp will be allowed for approved promotions where it is not possible to include these due to the space available in the financial promotion being limited by a third-party provider. Here, firms must display the Firm Reference Number of the approval instead of the full name and date of approval. The text must link to a webpage where the firm’s full name and date of the approval must be displayed.
11. Firms should have competence and expertise in the investment to which the financial promotion relates. A firm does not necessarily require competence and expertise in the day-to-day commercial activities of the company issuing the investment.

Impact on Cryptoassets

The new rules will not apply to cryptoasset promotions as previously intended. The FCA confirmed final rules for such promotions will be published once the relevant legislation to bring qualifying cryptoassets within the financial promotion regime has been made. The FCA has indicated the rules are likely to follow the same approach as for other HRIs and reiterated that cryptoassets remain high-risk.

Consultation on LTAFs

On the same day, the FCA published a separate consultation on broadening retail access to the long-term asset fund (LTAF) regime. For background, please see our previous article which looks at the new, distinct category of an authorised open-ended fund in detail. In CP22/14, the FCA proposes to re-classify the LTAF as a RMMI, based on the rules set out in PS22/10, described above. The proposals would allow access to usually hard to reach investments, facilitating greater diversification and more investment opportunities. Our article discusses this development.

Timelines

Rules related to risk warnings for financial promotions of HRIs will have effect from 1 December 2022. All other rules will have effect from 1 February 2023. The FCA will closely monitor the implementation of the rules and will act where firms breach them.

The FCA is welcoming feedback until 10 October 2022 and will confirm its final rules in early 2023.

Next steps

Firms should consider the new rules and ensure that they are aware of the implications on their business along with preparing an implementation strategy.

Co-authored by Anna Burdzy

This article was first published in Thomson Reuters on Thursday 4 August 2022.