The FCA ‘focus in’ on Financial Promotions

June 10, 2022 by Sam Rowe

For as long as I have been working in Compliance, Financial Promotions have been a challenge for Marketing and Compliance teams alike, looking to find the right balance between highlighting the commercial advantages of a company or investment, whilst at the same time identifying any associated risks. The FCA are also looking at this balance and as such I have tried to summarise below the main challenges and changes Firms could see in the next year in this area.

The FCA identified ensuring that they have effective oversight of firms communicating and approving financial promotions as one of their key activities in their Business Plan 2022/23. This was reiterated in a recent speech by Sheldon Mills, the Executive Director of Consumers and Competition at the FCA, who stated “[the FCA] need to help consumers avoid making investments based on misleading or unclear financial promotions or advertisements, especially online”.

What is a Financial Promotion?

The FCA handbook defines a Financial Promotion as an “invitation or inducement to engage in investment activity”. This covers anything that will promote your brand or your company’s products and applies to any form of communication, whether it is a social media post, video, email etc. If the promotion is created by an Appointed Representative the Principal firm is still responsible for the material and must ensure it meets FCA requirements.

FCA Handbook

The handbook states that a promotion:

  • Should pay regard to its target market, including its likely level of financial capability;
  • Should communicate information in a way that is fair, clear, and not misleading; and
  • Should be assessed regularly along with systems and controls for the approving firm to effectively manage the risks posed by providing information to customers.

Further information on approving and communicating financial promotions can be found in COBS 4.10.

How might the rules change?

On 19th January, the FCA published Consultation Paper 22/2, aimed at reviewing whether its financial promotion regime remains fit for purpose. This consultation was to make changes to protect consumers from harm, especially with regards to high-risk investments that do not match consumers risk tolerance.

The main changes detailed in CP22/2 are:

  1. Separate FCA permission to approve financial promotions: for unauthorised firms. Firms with this permission will be known as ‘s21 approvers’ (Section 21 FSMA). One thing the rules mention is that S21 approvers will need to ensure that they have the necessary knowledge and experience to approve financial promotions.
  2. Improving classification of high-risk investments: Specifically with regards to the rules in COBS 4 (Communicating with clients). These changes will make it clearer for firms what restrictions apply to them and will help firms to understand the rules.
  3. Improving the ‘consumer journey’ or onboarding process: Some measures the FCA have stipulated are improved risk warnings, stronger appropriateness tests and banning inducements to invest.
  4. Risk Warnings: There are also going to be more specific rules on the content of risk warnings and certain language will be banned for high-risk investments, such as ‘refer-a-friend bonuses’.
  5. Relevant expertise:  Alongside the new permission brought in for firms approving financial promotions (s21 approvers), there will be greater scrutiny of approving firms. The FCA have stated that they expect firms to conduct self-assessments to determine whether they currently have the relevant experience/qualifications in the sector the financial promotions relate to and to keep this up to date as part of their usual record-keeping obligations.
  6. Date Stamp: The FCA have also asked firms to include a new date stamp for approved promotions along with the name of the s21 approver. This will help consumers identify which authorised firm has approved the promotion as well as whether it is outdated.
  7. Applying the Financial Promotion rules to cryptoassets: Financial promotions relating to cryptoassets will need to comply with the FCA’s existing rules in COBS 4 and the FCA are consulting on how it will categorise cryptoassets once they are brought into the Financial Promotions regime.

When will the changes come in?

The FCA closed the consultation on 23rd March 2022 and are expected to publish a Policy Statement and final Handbook rules in summer 2022. Once in, the FCA will give firms three months to comply with the new requirements.

What can firms do now?

Firms should review what kinds of financial promotions they are publishing and work with their marketing and compliance departments to create a sign off process which is robust and tailored to their business. As financial promotions and reducing/preventing financial crime is one of the FCA’s key outcomes in their business plan this will undoubtedly be a large area of focus for the regulator in the next year.

How Effecta can Help:

  1. Independent Reviews: Effecta can review your Financial Promotions and provide feedback to the relevant teams to ensure they are compliant with UK rules
  2. 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 upcoming rule changes.
  3. 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.
  4. 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.