FCA sets out plans to strengthen financial promotion rules for high-risk investments

Out-Law News | 11 Aug 2022 | 11:43 am | 4 min. read

The Financial Conduct Authority (FCA) has published new rules on the financial promotion of high-risk investments.

The regulator said the changes were intended to “reduce and prevent the harm” to consumers from investing in high risk investments “that do not match their risk appetite.” It added that failures and unexpected losses for retail investors “undermine confidence in UK financial markets” and that a reduction in the “take-up” of some investments offered to retail investors was an “inevitable consequence” of the new regime.

Under the new rules (205 pages / 1.86MB PDF), the FCA will  “rationalise” the marketing restrictions on high-risk investments into product categories, so products will be categorised as readily realisable securities (RRS), restricted mass market investments (RMMI) or non-mass market investments (NMMI). The RMMI classification, which applies to non-listed shares and bonds, peer-to-peer (P2P) loans and – eventually – qualifying crypto-assets, will allow mass marketing to retail investors subject to certain restrictions.

The FCA said that, while not all investments subject to the RMMI rules will have the same risk profile, they are only likely to be appropriate for consumers “as a small part of a diversified portfolio” and represent a higher risk to retail investors. It added that ordinary retail investors will have to confirm that they will limit their exposure to RMMI investments to no more than 10% of their net assets. Products categorised as NMMI will be banned from mass marketing to retail completely. Non-mainstream pooled investments (NMPI) and speculative illiquid securities (SIS) – both already banned from marketing to retail – will be re-categorised as NMMI.

The FCA said it is concerned that “too many consumers are just ‘clicking through’ and accessing high risk investments without understanding the risks involved”. Its plan to protect them includes prescribing risk warning wording for firms to use. It said the standard wording for high-risk investments will be: “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 two minutes to learn more.” There will also be two alternative risk warnings for P2P loans, and for investments that involve an authorised person or an appointed representative and could give rise to a Financial Services Compensation Scheme (FSCS) claim. 

The FCA also set out its requirements for personalised risk warnings, help for clients to categorise themselves accurately, and stronger rules around the appropriateness test for RMMIs, as well as a ban on incentives – like ‘refer a friend’ and ‘new joiner’ bonuses. The FCA’s rules on the main risk warning and risk summary apply from 1 December 2022 with the remainder of the rules, including those for the personalised risk warning pop-up or its equivalent, taking effect from 1 February 2023. 

Josie Day of Pinsent Masons said: “Firms will welcome the slightly longer than originally proposed implementation period FCA has granted for some changes, but will need to keep the two deadlines in mind as they make their implementation plans. They need to implement the conduct requirements for the main risk warning and summaries by 1 December this year, so will have to get to grips with the relevant rules for the different media that may be used for promotions ahead of time. Firms may also need to change their processes, in light of the requirements aimed at helping customers categorise themselves better, to effectively assess answers that would-be investors provide.”

She added: “The Treasury has been consulting on reforming the Financial Promotion Order exemptions in respect of high net worth individuals and sophisticated investors, seeking views on whether firms should have greater responsibility for making sure investors meet the criteria. The Treasury also asked for feedback on increasing the financial thresholds for high net worth individuals and whether other tests could be used to show an investor’s sophistication. So this area may continue to be a moveable feast, if the legislation is eventually changed.”

The FCA will also strengthen the role of firms that approve financial promotions for unauthorised firms under section 21 of the Financial Services and Markets Act 2000 (FSMA), known as ‘s21 approvers’. The FCA will require s21 approvers to “play a more active role in ensuring approved promotions remain compliant” for the lifetime of the promotion, to avoid the “once and done” approach. 

All approved promotions will have to include the name of the authorised firm approving the promotion, or the firm reference number in certain situations where there are limitations on space, as well as the date of approval. The regulator also outlined new competence and expertise requirements for firms that approve or communicate financial promotions, to ensure they meet high standards. 

Juan Jose Manchado of Pinsent Masons said: “The FCA has concluded that the new rules on approving the financial promotions of unauthorised persons will not dissuade firms from offering their approval services. But it is unclear whether there has been any further discussion with Treasury about the possibility of allowing the approval of qualifying crypto-asset promotions by firms not authorised under FSMA.”

“Some e-money issuers and payment institutions, who currently cannot be s21 approvers, have been involved in qualifying crytpo-asset business for some time, and as a result they may have stood a better chance of meeting the new competence and expertise requirements. The ongoing monitoring requirement may also be particularly demanding in relation to the approval of crypto promotions, given the fast pace of change in that sector,” Manchado said.

He added: "Next moves in the reform of the financial promotions regime include the Treasury introducing legislation to bring qualifying crypto-assets within the scope of the financial promotions regime, while the FCA works towards operationalising the new gateway for approvers of promotions by unauthorised persons, which was recently introduced in the Financial Services and Markets Bill.”