The FCA recently published its policy statement (PS22/10) on strengthening financial promotion rules for high-risk investments and firms approving financial promotions. The new rules are being put in place to prevent consumer harm caused by investments into high-risk products that may not match investors’ risk appetite. The regulator consulted on the proposed rule changes earlier this year (CP22/2) – a summary of the consultation paper and ShareIn’s response can be found here.
What are the new rules?
The proposed new rules as set out in the policy statement include new product categorisations for high-risk investments, stronger risk warnings to be used in financial promotions, positive frictions firms will need to introduce to ensure that consumers do not “sleepwalk” into risky investments, improvements to client onboarding, clearer approval information on financial promotions, and the banning of inducements to invest such as “refer a friend” schemes. The risk warning rules will take effect from 1st December 2022, while the remaining rules will come in from 1st February 2023.
The FCA is rationalising its categorisation of high-risk investments by grouping together products with broadly similar characteristics to ensure consistent treatment of each category under the financial promotion rules. The 2 new categories for high-risk investments are:
· Restricted Mass Market Investments (RMMI), which includes Non-Readily Realisable Securities (NRRS) such as shares or bonds in unlisted companies, Peer-to-Peer (P2P) agreements, and qualifying cryptoassets (the latter is subject to parliamentary approval and the final FCA rules for cryptoassets), where mass marketing is permitted to retail investors subject to restrictions outlined in the financial promotion rules; and
· Non-Mass Market Investments (NMMI), including Non-Mainstream Pooled Investments (NMPI) such as pooled investments in unauthorised funds and Speculative Illiquid Securities (SIS) such as speculative mini-bonds, where mass marketing to retail investors is banned.
Stronger risk warnings
Clearer, more prominent risk warnings must be used for RMMIs and NMMIs to help investors better understand the risks involved in these investments. The new standard risk warning for high-risk investments is as follows:
“Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2mins to learn more.”
The “Take 2mins to learn more” text must link to a product-specific risk summary which appears as a pop-up or equivalent. The risk warning message may be adjusted based on the specific product sub-type (e.g. P2P agreements or P2P portfolios) and space constraints of the medium used to communicate the promotion; specific guidance on the wording to be used and the prominence requirements are laid out in the proposed new rules.
In addition to the risk warning and summary, first-time investors must be presented with a personalised risk warning pop-up (or equivalent) before being presented with a Direct Offer Financial Promotion for the first time. (Whilst the stronger risk warning and “Take 2mins” come into effect from December 2022, the personalised risk warnings will come in from February 2023.)
For first-time investors, a 24-hour “cooling off” period will apply. During this 24-hour period, a firm may proceed with other parts of the customer onboarding journey such as KYC/AML checks, client categorisation, and the appropriateness test.
An evidence component is being introduced to the client categorisation stage of the client onboarding journey, whereby clients will be asked to provide their income, net assets, or other information in support of their selected categorisation. Firms will then need to assess whether the information provided matches up with the client category (though they will not necessarily need to undertake further verification of these statements).
The rules regarding appropriateness tests that clients must successfully pass before they can invest have become more prescriptive under the new rules – for example, if a client fails the test then they must wait 24 hours before taking it again.
A date and time stamp will need to be included indicating when the financial promotion was approved under section 21 of the Financial Services and Markets Act 2000 (FSMA), as well as the name and Firm Reference Number (FRN) of the approving firm. Where space is limited by a third-party marketing provider, the FRN can be displayed without the full name and approval date, however this must link through to a web page with the approving firm’s full name and date of approval.
Monetary and non-monetary incentives such as “refer a friend” schemes or new joiner bonuses have been banned under the new financial promotion rules. The FCA were concerned this type of short-term inducement can lead to poor investment decisions and cause harm to retail clients who may be induced into investing in products that do not match their risk profile.
Completing the picture
The new rules laid out in the FCA policy statement form a key part of the regulator’s 3-year Consumer Investments Strategy which focuses on addressing consumer harm in the market. It is also strongly aligned with the new Consumer Duty which sets a higher standard for regulated firms in delivering good outcomes for retail consumers.