Promoting high-risk investments – the FCA’s new rules

The FCA has recently published its policy statement (PS22/10) on the financial promotion rules for high-risk investments (HRI) and firms approving financial promotions. This follows consultation in CP22/2 on the topic in January 2022 aimed at strengthening its financial promotion rules for HRI, including cryptoassets.

The FCA is making amendments to its rules in respect of (i) the classification of HRI; (ii) the consumer journey into HRI; and (iii) strengthening the role of firms approving and communicating financial promotions. This blog post looks in more detail into each of these.

Why is the FCA changing the classification of HRI?

The FCA has decided to rationalise and simplify already existing marketing restrictions in respect of HRI so as to cover a broad range of investments with different risks. This is being done by the introduction of two financial promotion marketing restrictions product categories in COBS 4:

• Restricted Mass Market Investments (RMMI): This covers non-readily realisable securities such as shares and bonds in an unlisted company, peer-to-peer agreements and some qualifying cryptoassets to be announced once legislation has been approved. This category permits mass-marketing to retail investors subject to certain restrictions, e.g. that the investor does not invest more than 10 per cent of its net assets and that the investment is considered appropriate for them; and
  
  
• Non-Mass Market Investments (NMMI): This includes non-mainstream pooled investments such as pooled investments in an unauthorised fund and speculative illiquid securities, e.g. speculative mini-bonds. Mass marketing to retail investors is banned for products falling into this category as these products are likely to be suitable mainly for high net worth and sophisticated retail investors.

A package of measures to improve the ‘consumer journey’ into HRI

The FCA is introducing various measures designed to strengthen protections embedded within the ‘consumer journey’, to improve customers’ understanding of the risks involved with accessing HRI. These include:

• Improving risk warnings: Due to the perceived ineffectiveness of the existing ‘capital at risk’ warning, the FCA is prescribing a new standard risk warning for all RMMI and NMMI:

‘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 2 mins to learn more.’

This precise wording must be used except for certain promotions, such as those relating to peer-to-peer agreements, where an alternative prescribed text must be used. In contrast, the ‘risk summary’ (for which there will be a link included in the risk warning), can be tailored to the particular investment offering, provided there is a valid reason for doing so.

• Banning incentives to invest: With limited exceptions, financial promotions containing any monetary and non‑monetary benefits that incentivise investment activity (such as ‘refer a friend’ or new joiner bonuses) will be banned.
  
  
• Cooling off period: First time investors with a firm will have to wait 24 hours from being shown a financial promotion before being able to invest.
  
  
• Personalised risk warning pop-up: Firms will need to address a prescribed risk warning to each specific consumer prior to communicating the financial promotion, which will link to the same product-specific risk summary as in the main risk warning.
  
  
• Helping clients better categorise themselves: As part of the self-categorisation process, consumers will need to declare why they meet the relevant criteria (such as stating their income to demonstrate they are high net worth). The FCA has clarified that firms will have to check that the evidence provided meets the relevant criteria, but will not have to perform diligence beyond that (such as requesting supporting documentation).
  
  
• Appropriateness test: The appropriateness test rules for RMMI will be enhanced in several ways, including requiring firms to ensure that customers must answer different questions each time they undertake the assessment, and preventing firms from encouraging customers to re-take the appropriateness assessment after the investment has been assessed as inappropriate for them.

How will the role of firms approving and communicating financial promotions be strengthened?

The FCA has introduced a package of measures designed to strengthen the role of a section 21 (Financial Services and Markets Act 2000 (FSMA)) approver. Measures introduced include: (i) the inclusion of the name of the firm approving the promotion (or at least the firm reference number) and the date of approval; (ii) approvers must ensure that the approved promotion remains compliant for the duration of the promotion; (iii) ‘conflicts of interest’ obligations will be extended to section 21 approvers so as to reduce the likelihood of anti-competitive behaviour where an approver is being asked by a competitor to approve a promotion; and (iv) approvers of NMMI promotions will be required to conduct a suitability assessment before a firm can communicate a promotion to high net worth or sophisticated investors.

In addition, the FCA is introducing a rule that firms communicating or approving financial promotions must have the relevant competence and expertise (C&E) in the product being promoted. This will require the firm to self-assess whether it has the required C&E in respect of the product itself, e.g. in the event of a promotion of an unlisted equity share, the firm needs to show that it has C&E in unlisted equities rather than the commercial sector (e.g. mining) the investment relates to.

These proposals should be viewed against the background of the proposal in the Financial Services and Markets Bill to amend FSMA by requiring firms approving financial promotions to have permission from the FCA to do so. This means that the general permission currently under section 21 FSMA that enables any authorised firm to approve the content of financial promotions is being limited under the Bill (for more information on the Bill, see our post).

Next steps

The rules relating to main risk warnings for financial promotions of HRI will come into force from 1 December 2022. All other rules will become effective from 1 February 2023. The FCA intends to review the categorisation of HRI for any inconsistency under the revised rules in 2023.

Cryptoasset promotions currently fall outside the remit of the FCA, therefore PS22/10 does not cover such promotions. Once relevant legislation has been made to widen the FCA remit in this respect, the FCA expects to publish the final rules for cryptoasset promotions following the consultation on the proposed rules in CP22/2.