To enhance consumer protection and to tackle misleading adverts that encourage investment in high-risk products, in August 2020 the FCA published stronger rules relating to the financial promotions of high-risk investments (HRIs). The new rules, in connection with the new Consumer Duty, are designed to prevent harm from such investments and firms may need to think about going beyond regulatory minimums to consider the needs of their clients!!
The new rules do not apply to cryptoasset promotions, however firms should expect equivalent rules to be applicable when the legislation is updated to bring cryptoassests within the financial promotion regime.
FCA Aims & Objectives:
The FCA wants the financial promotions regime to be rigorous and fit for purpose, especially in the fast-changing fintech environment, with promotions via online platforms and on social media. The broad expectations of are :
- Clients receive high-quality financial promotions so they can make a fair, effective, and well informed investment decision.
- The approval of financial promotions of HRI are subject to high standards and rigorous processes; and
- Clients only receive appropriate promotions of HRIs where there is a reasonable prospect they will understand the risks involved.
What Do The New Rules Say?
In a little more detail, the new rules have:
- Introduced Restricted Mass Market Investments (RMMI) and Non Mass Market Investments (NMMI) categories for financial promotions;
- Introduced prescribed and stronger risk warnings for all RMMIs and NMMIs;
- From December 2022, banned inducements to invest e.g., ‘refer a friend’ bonuses for RMMIs and NMMIs [NB. “shareholder benefits” will be exempt];
- Introduced personalised risk warning pop ups for first time investors in RMMIs and NMMIs;
- Introduced a 24-hour cooling off period for first time investors in RMMIs and NMMIs;
- Changed the investor declarations for ‘restricted’, ‘high net worth’ and ‘sophisticated’ investors, with more emphasis on an declarations;
- Changed the rules on appropriateness to ensure that all investors pass a robust assessment of their knowledge and experience;
- Enhanced requirements on approvers of promotions, inc. recording specific approvers, their levels of expertise, and ongoing monitoring requirements; and
- Introduced record keeping requirements for firms to monitor the outcome of the consumer journey for RMMIs and NMMIs;
Rules relating to FCA’s main risk warnings for financial promotions for HRI’s will take effect from 1 December 2022. All other rules will have effect from 1 February 2023. Firms should expect the FCA to monitor the implementation of these rules, with some inevitable follow-up actions should they fail to do so.
Together with their implementation plans for the Consumer Duty, firms should factor in the new rules for HRI promotions. Firms should consider establishing work plans to revise applicable processes and practises, with effective governance and follow-up assurance processes to ensure they are meeting FCA expectations.
How Can We Help?
Danos Consulting is a specialist resourcing and consultancy firm for leading organisations across Financial Services. We have an excellent track record for delivering flexible compliance solutions, whether that is providing resources to augment project delivery or delivering a programme of work from impact assessments, identifying key gaps and weaknesses, to undertaking in-depth actions to achieve improvements.
If you would like to discuss this further, please contact Gurjit Purewal who will be very happy to advise on the right solutions to ensure you are meeting your regulatory responsibilities.
Gurjit Purewal | Head of Consulting Solutions | Danos Consulting
E: email@example.com | T: +44 (0) 20 7610 6442.