FCA sets out new rules on financial promotion of high risk investments

What’s new?

On 1 August 2022, the FCA published policy statement PS 22/10, “Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions” (the PS).

The PS sets out final rules (as well as non-Handbook guidance on approving financial promotions) following the FCA’s January 2022 consultation paper, CP 22/2.

The PS was published at the same time as, and has links to, the FCA’s consultation (CP 22/14) on broadening retail access to Long-Term Asset Funds (LTAFs) – see our summary of CP 22/14 here.

What happens next?

The majority of the new rules will apply from 1 February 2023, although those related to risk warnings for financial promotions of high risk investments will come into effect from 1 December 2022.

The non-Handbook guidance will take effect from its publication on the FCA website on 1 February 2023.

Final rules in respect of cryptoasset promotions will be published once the relevant legislation to bring qualifying cryptoassets within the financial promotion regime has been made.

The FCA intends to review the categorisation of high risk investments under the new rules in the second phase of its work, scheduled for 2023.

What’s the background to the PS?

In January 2022, the FCA consulted on strengthening financial promotion rules for high risk investments, including cryptoassets - see our summary of CP 22/2 here.

(Although cryptoasset promotions currently sit outside the FCA’s remit, HM Treasury has confirmed that it intends to bring certain cryptoassets into the scope of the financial promotion regime. Final rules for cryptoasset promotions will only be published once the relevant legislation has been made but, subject to any changes in circumstances, the FCA expects to take a consistent approach to cryptoassets to that taken for other high risk investments.)

The FCA accepts that high risk investments “have a place in a well functioning consumer investment market” provided the investor both understands the risks involved and is able to absorb potential losses.

Consumer research, though, indicates that too many consumers are investing in high risk products which are not aligned with their risk tolerance and which are unlikely to meet their needs. Higher inflation rates (which have led to negative real returns across many mainstream investments) and increases in the cost of living have raised the chances of some consumers turning to high risk investments in a search for higher returns at a time when they have less money available to absorb losses.

What did the FCA propose?

CP22/2 set out possible changes in a number of areas:

The classification of high risk investments

Current rules allow Non Readily Realisable Securities (NRRS) and Peer to Peer (P2P) agreements to be mass marketed to retail consumers, subject to certain restrictions, while Non Mainstream Pooled Investments (NMPI) and Speculative Illiquid Securities (SIS) cannot.

An NMPI includes the following investments:

• a unit in an unregulated collective investment scheme (UCIS);
• a unit in a qualified investor scheme (QIS);
• a unit in a long term asset fund (LTAF);
• certain securities issued by special purpose vehicles; and
• a traded life policy investment.

Aware that its existing marketing restrictions are widely considered difficult to navigate and that it can be challenging to understand what restrictions apply, the FCA proposed a rationalisation of its rules in COBS 4 under the terms ‘Restricted Mass Market Investments’ (RMMI) and ‘Non Mass Market Investments’ (NMMI).

As both NRRS and P2P agreements are subject to the same marketing restrictions, under the proposals in CP 22/2, these investments would be categorised as RMMI.

The ‘consumer journey’ into high risk investments

The FCA was concerned that, despite marketing restrictions intended to make sure consumers only access high risk investments knowingly, too many consumers access them without understanding the risks involved.

CP 22/2 proposed a package of changes, including:

• strengthening risk warnings;
• banning inducements to invest;
• introducing positive frictions;
• improving client categorisation; and
• stronger appropriateness tests.

Strengthening the role of firms approving and communicating financial promotions

The FCA looked to strengthen the role of firms which approve financial promotions (‘s21 approvers’) and to develop ‘a robust regime to complement the proposed s21 gateway’.

When implemented, this should mean that all s21 approvers will meet high standards and have the relevant expertise in the promotions they approve.

What changes has the FCA made to its proposals?

Key changes from CP 22/2 proposals include:

The classification of high risk investments

The FCA is proceeding with its proposals under CP 22/2 as set out above.

It should be noted, though, that, as part of its consultation on broadening retail investor access to the LTAF, CP 22/14 sets out proposals to recategorise the LTAF as an RMMI, rather than an NMMI. This would enable LTAFs to be generally mass marketed. However, if a firm wanted to move beyond general mass marketing and the prospective investor does not receive a personal recommendation, then the DOFP rules would apply.

Investments issued by local authorities

The FCA’s final rules will clarify that the marketing restrictions do not generally apply to investments issued by local authorities. This will not affect units in UCIS.

Risk warnings and associated risk summaries

The main risk warning for high risk investments will be shortened and alternative risk warnings will be permitted (a) for P2P agreements and portfolios and (b) where the activity of the product issuer or provider could be covered by the Financial Services Compensation Scheme.

Firms will be able to vary from their prescribed risk summary where they have a good reason to do so (for example, where the wording would be misleading or irrelevant).

Direct Offer Financial Promotion (DOFP) rules

Clarification has been included that the DOFP rules relate to promotions which include a manner of response or includes a form by which any response may be made. They should not limit the information firms can otherwise provide about the investment.

Cooling off period

It will be clarified that the 24 hour cooling off period starts from when the consumer requests to view:

• the direct offer financial promotion (for RMMI); or
• the financial promotion (for NMMI).

Although firms will not be able to show consumers the relevant financial promotion until at least 24 hours have elapsed, they can proceed with other steps, such as KYC/AML checks, client categorisation and appropriateness assessments while the cooling off period is on-going.

Client categorisation

We will clarify that where consumers must provide their income/ net assets to show they are high net worth they can provide these to the nearest £10,000/£100,000 respectively. We will clarify what level of checks we expect firms to conduct on the information provided by the consumer in the investor declaration.

Appropriateness assessment

We will modify our rules so that consumers must wait at least 24 hours before undertaking the appropriateness test again from their second assessment onwards.

Implementation period

The implementation period has generally been extended to six months - however, the main risk warning rules (risk warning and risk summary, but not the personalised risk warning) must be implemented within four months.

Competence and expertise requirements

The FCA will provide greater clarity that firms should have competence and expertise in the investment to which the financial promotion relates – this does not mean that the firm necessarily needs to have competence and expertise in the day to day commercial activities of the company which issues the investment.