FCA Financial Promotion Rules
October 4, 2022 by Sam Rowe
FCA Financial Promotion Rules
The FCA have recently published a policy statement (PS22/10) “Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions”. These new rules for authorised firms are part of HMT/FCA’s proposals to overhaul the UK Financial Promotion regime.
The new rules are applicable to all firms involved in the issuance of Financial Promotions and whilst the FCA have been clear these rules are aimed at high-risk investments; the Regulator has stated it will be looking to change the regime for all authorised firms going forward.
Why are these Rules coming through now?
The FCA are concerned that given the current economic climate, notably inflation rates being as high as they are, consumers will be more likely to invest in high-risk investments, due to the potential returns they can generate. At a time when people are dealing with a cost-of-living crisis, there is concern consumers may look to engage with investments outside of their risk tolerance.
The FCA hopes that the implementation of these new rules will help to ensure firms are:
- Communicating clearly with consumers about the risks associated with high-risk investments.
- Providing customers, with clear information needed to make informed decisions about available investment opportunities.
- Approving financial promotions to a high standard.
What are High-Risk Investments?
High-risk investments are described by the FCA as investments which may offer the chance of higher returns but put consumers money at higher risk.
Some examples of high-risk investments include Cryptoassets, Mini bonds (high interest return bonds), structured products and Contracts for Difference (CFDs).
As part of the recent policy statement, the FCA have categorised high-risk investments into groups by putting products with similar characteristics together:
- Category 1 – Readily Realisable Securities (RRS) – address listed or exchange traded securities – these products will have no restrictions on marketing
- Category 2 – Restricted Mass Market Investments (RMMI) – shares/bonds not on a regulated market/trading venue and Peer to peer loan agreements
- Category 3 – Non-Mass Market Investments (NMMI) – pooled investments in unauthorised fund, debentures, real estate purchases
To note cryptoassets currently fall outside of the scope of the rules although the Treasury is legislating to bring them within rules for financial promotions.
When are the new rules coming into force?
Most of the rule changes will come into force on 1st February 2023, apart from the changes to Risk Warnings which take effect from 1st December 2022.
What are the new rule changes?
Other than the above noted new classifications of high-risk investments (Chapter 3), the FCA rules focus on making changes to the “Consumer Journey” and the approval and communication of marketing materials/financial promotions.
Changes to the consumer journey
The FCA believe it is currently too easy for consumers to click through and access high-risk investments without acquiring an adequate understanding of the risks involved. To address this, the FCA are putting in place the following seven measures:
- Requirement for Firms to strengthen the content of their risk warnings
- A ban on inducements to invest (for Direct Offer Financial Promotions)
- The Introduction of positive frictions (slowing down the period between the issuance of a Financial Promotion and a subsequent account opening)
- Improvements to the criteria for client categorisation
- Stronger appropriateness tests
- Requirement to complete preliminary suitability assessments (for NMMI’s only)
- Enhanced Record-keeping requirements for firms
What do these measures mean?
- Strengthened Risk Warnings
The FCA have made changes to their guidance surrounding Risk Warnings. They have stated that risk warnings must be:
- Legible and contained within its own border, with the correct bold/underlined text
- Statically fixed at the top of the screen even when the client scrolls up/down the page
- On every linked page that relates to the investment
The following wording has also been suggested as a standard for firms to follow:
1 The “Take 2 mins to learn more” should link through to a full risk summary which will be in a prescribed format (which will be contained within FCA COBS 4 Annex 1R).
This proposed standard wording is to ensure Firms move away from the standard “Capital at risk” statement, which the FCA does not believe is always understood by consumers.
- Banning Inducements to invest
The new rules place restrictions on direct offer financial promotions (“DOFP”), specifically banning inducements to invest for DOFP’s.
DOFP’s are time pressured promotions, for example ones which include a “buy now” or “invest now” button or a form which asks for the customer’s bank details up front without any prior contact.
In addition, the FCA have decided to ban activity that incentivises investments such as “refer a friend” or new joiner bonuses.
- Cooling off period
For first time investors with a firm, the FCA are introducing a minimum 24 hour cooling off period between when the consumer requests to be able to invest and when they are able to place their money in the investment. It should be noted that during this time firms are allowed to conduct onboarding checks etc.
- Personalised risk warning pop-up
For first time investors with a firm, a personalised risk warning should be displayed as a ‘pop-up or equivalent’. This warning must fill the centre of the screen and be followed with the client specifying whether they wish to leave or continue. The suggested wording is below. Firms are able to tailor this, but any changes must have an accompanying rationale which the Firm will need to record.
- Improving Client Categorisation
The new rules introduce an evidence component to investor categorisation. For example, for high-net-worth investors their level of income must be stated. To protect privacy of investors this can be rounded to the nearest £10,000/£100,000, respectively. Firms will not be required to request further evidence than this outside of their standard Source of Funds/Wealth evidence. However, the FCA believes this will help improve the self-certification process.
- Appropriateness Test
To ensure Firms are properly ascertaining whether the client has sufficient knowledge and experience:
- The FCA will introduce guidance on the types of questions required to be covered in the appropriateness test. The main purpose of this is to move away from the binary yes/no answers which consumers can give.
- Consumers must wait at least 24 hours before undertaking the appropriateness test if they fail it in the first instance. The FCA also want the questions posed to consumers to be different each time they are asked.
- Firms should not encourage clients to retake the test after they have been assessed as inappropriate.
- Preliminary Suitability Assessment
In the case of Non-Mass Market Investments (NMMI’s), self-certified sophisticated or high-net-worth investors are subject to a preliminary assessment of their suitability. This is in order for the firm to assess whether the investment will meet the client’s needs and objectives.
- Record Keeping requirements
The FCA have mandated firms to record metrics relating to client categorisation and appropriateness. The regulator states firms should already have a record of this information and believe this should not be an additional regulatory burden.
Strengthening the role of Approver
Perhaps the biggest change from the new rules relates to those firms which are approving financial promotions. Such Firms will be required to ensure the person approving Financial Promotions has the relevant expertise and will hold personal responsibility for the overall quality of Financial Promotions issued to consumers.
The FCA has prescribed the following rules to be implemented by those approving Financial Promotions:
- All approved promotions must include the name of the authorising firm as well as the date of approval. The required format for this is ‘Approver FRN xxxxxx’. This text must be ‘clickable’ and must open a page where the approval firm’s full name, and the date of the approval is displayed.
- Approval Firms must self-assess whether they have the necessary competence and expertise (C&E) to approve a Financial Promotion. C&E must be related to the investment product itself.
- Firms must continuously monitor compliance of any approved promotions. For example, articles on a website must not be changed without approval and the approval firm must implement controls to ensure this policy is adhered to. For example, Firms must request attestations of ‘no material change’ every 3 months for the lifetime of the approved promotion.
What should firms be doing now?
Firms that promote high-risk investments need to familiarise themselves with the FCA’s final rules and carry out the following:
- Identify/classify high-risk investments they promote (RMMI/NMMI)
- Update and change risk warnings as per the guidelines by 1st December 2022
- Train staff on the new rules
- Implement systems and controls to record metrics for appropriateness/categorisation
Firms that approve financial promotions need to:
- Ensure that their name and date of approval are included on all future promotions
- Carry out self-assessments as to whether they have the necessary competence and experience to approve financial promotions
- If an S21 approver, obtain necessary attestations that there are no material changes to previously approved promotions
Effecta can help by:
- Conducting a health check of firm’s ‘Consumer Journeys’ or Onboarding Procedures to ensure they are compliant with the new rules.
- Carrying out Independent Reviews of your Financial Promotions and provide feedback to the relevant teams to ensure they are compliant with UK rules.
- Procedure Evaluation: For firms who already have a Financial Promotion sign off procedure in place, Effecta can review whether it continues to be fit for purpose with the rule changes.
- Training: Effecta can deliver training to Marketing or Compliance teams alike on what the rules mean for their work and what they should be looking out for when preparing Financial Promotions.
- Templates: Effecta are also able to provide useful templates for your sign off process including a Financial Promotion ‘Cheat Sheet’, process ‘Decision Tree’ and a Sign Off form. Should you wish to receive these templates, please register online here.