Another day, another policy statement from the FCA – this time it’s all things financial promotions. Who doesn’t love a financial promotion!? (Well, besides the FCA if they are not done correctly!) 

The new policy statement has the catchy title ‘Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions’. We at Apricity don’t expect this policy statement to have a direct impact for many of our firms, but it will benefit investors who are looking to invest in high-risk assets. Or even those investors who are not currently sure the assets they are looking to invest in are, in fact, high risk! The policy supports the recently finalised final guidance for Consumer Duty, ensuring that firms are considering the needs of their customers and making sure that they have good outcomes, specifically focusing on the ‘consumer understanding’ outcome.  

The policy statement discusses how Covid-19 and higher inflation rates have accelerated trends of investing into high-risk products, and how high-risk investments were targeting customers with adverts online. Social media is inundated with these high-risk investments, with risk disclosures / warnings at a minimum. Combine that with increased potential for vulnerability… and here comes the need for regulatory intervention. Data from the IPSOS MORI suggests that the proportion of consumers owning certain high-risk investments increased by 65% between March 2020 and June 2021. 

By definition, a financial promotion is something that can be communicated in any way and is defined as an ‘invitation or inducement to engage in investment activity’. This covers any form of marketing material that persuades a customer to buy a product. Many firms struggle with knowing when something is classed as a financial promotion, and ensuring that this sticks to the ‘clear, fair and not misleading’ rule – which is why we are here to help! 

The policy statement confirms that the FCA is expanding its classification of high-risk investments within COBS 4 under the new terms ‘Restricted Mass Market Investments’ and ‘Non-Mass Market Investments’. Currently Non-Readily Realisable Securities (NRRS) and Peer to Peer agreements could be mass marketed to retail consumers while Non-Mainstream Pooled investments (NMPI) and Speculative Illiquid Securities (SIS) could not. The new rationalisation is designed to make this easier for firms to interpret the rules. 

The FCA is introducing a whole host of changes for clients investing into high-risk products. In short, these are: 

  • Strengthening risk warnings,  
  • Banning incentives to invest, 
  • Introducing positive frictions, 
  • Improving client categorisation,  
  • And introducing stronger appropriateness tests. 

There are now new revised risk warnings that firms should make themselves aware of if they are offering these products to clients. There are also new requirements as to how risk warnings should be formatted, some of which will now be risk warnings personalised to the client.  

There will be a ban on firms using financial promotions on high-risk investments from containing any monetary and non-monetary benefits that incentivise investment. 

The policy also sees the implementation of a 24-hour cooling off period for first time investors with a firm from the time the customer requests to view the direct offer financial promotion (for RMMI); or the financial promotion (for NMMI).  

There will now be more emphasis on the consumer to evidence how they meet the criteria, for example evidencing income to show they are high net worth, as well as an appropriateness test which confirms that the client has an appropriate level of knowledge and experience. 

The FCA is also looking to strengthen the role of firms approving and communicating financial promotions. The authorised firm approving the promotion must have their name and date of approval on the financial promotion. Firms must self-attest to confirm that they have the relevant competence and expertise in-house prior to communicating a financial promotion, if not then they must find an authorised person who does. 

An approver would need to take reasonable steps to monitor the continuing compliance of approved promotions to consider if there have been any changes that prevent the promotion from being clear, fair and not misleading. As part of the FCA’s requirement for ongoing monitoring, approver firms will be required to obtain attestations of ‘no material change’ from clients with approved promotions every 3 months, for the lifetime of the approved promotion. 

The rules related to the main risk warnings for financial promotions of high-risk investments will be in effect from 1st December 2022. All other rules will have effect from 1st February 2023. 

Our financial promotions guidance will be updated shortly to reflect the changes.