Written by Anna Davis and Jad Soubra
Further to its consultation earlier this year (see our previous post on CP22/2), on 1 August 2022 the FCA published its policy statement (PS22/10) on strengthening financial promotion rules for high-risk investments and firms approving financial promotions.
The FCA notes that its work has become more important since the publication of CP22/2; higher inflation rates have resulted in negative real returns across many mainstream investments which may push consumers into high‑risk investments in a search for higher returns. At the same time, the rising cost of living means consumers are less able to absorb potential losses. The new regime is designed to strengthen the regime for how high-risk investments can be promoted.
The PS does not set out final rules on cryptoasset promotions, as these investments remain outside the FCA’s remit until the Treasury legislates to bring certain cryptoassets into the scope of the financial promotion regime. While CP22/2 set out the FCA's proposed rules for cryptoasset promotions, final rules will not be made until the relevant legislation has been made by the Treasury.
In the policy statement, the FCA outlines feedback received in response to its consultation which generally agreed with the proposals put forward. Respondents showed strong support for the behavioural testing the FCA conducted for its consumer journey proposals as well as the changes it proposed to strengthen the role of authorised firms communicating and approving financial promotions. The final rules within PS22/10 are therefore largely in line with those consulted on, but the FCA has made several targeted changes to its proposals.
Some respondents (particularly from the investment-based crowdfunding (IBCF), peer‑to‑peer (P2P) and SME financing sectors) raised concerns that the regulator’s proposals in this area could have negative unintended consequences and deter consumers from investing. Based on this feedback, the FCA has made changes within its final rules to avoid such consequences, including:
- Competence and expertise requirements: Clarity is provided that firms should have competence and expertise in the investment to which the financial promotion relates. A firm does not necessarily require competence and expertise in the day‑to‑day commercial activities of the company issuing the investment.
- Risk warnings & risk summaries: The FCA has shortened its main risk warning for high-risk investments and will allow for alternative risk warnings in relation to P2P agreements/portfolios and where the product issuer’s activity is covered by the FSCS. For risk summaries, the FCA’s rules will allow firms to vary from the regulator’s prescribed summary if they have a good reason such as the wording would be misleading or irrelevant.
- Cooling off period: In CP22/2, the FCA proposed a minimum 24‑hour cooling off period for first time investors with a firm, meaning consumers could not receive a financial promotion / direct offer unless they reconfirmed their request to proceed after waiting at least 24 hours. Despite ‘net negative’ feedback on this proposal, the FCA continues to consider this an important measure and has therefore proceeded with it. The final rules provide further clarity around when exactly this cooling period is triggered and how it will work more generally.
- Client categorisation: The final rules clarify what level of checks the FCA expects firms to conduct on the information provided by the consumer in the investor declaration. :
- Appropriateness assessment: The final rules are modified so that consumers must wait at least 24 hours before undertaking the appropriateness test again from their second assessment onwards.
- Date and time stamp: An alternative format for the date and time stamp for approved promotions is now allowed where it is not possible to include these due to the space available in the financial promotion being limited by a third‑party provider
- Record keeping: Initially, proposals within the CP included asking firms to record a variety of data such as whether consumers click the link within the FCA’s prescribed risk warning – the intention being to capture the effect of the proposals. The FCA has clarified that it will now only require firms to record metrics relating to client categorisation and the appropriateness assessment. The regulator does, however, suggest that regulated firms involved in the distribution of high-risk investments should be considering other metrics as part of their compliance with the Consumer Duty.
- Implementation period: Whilst firms were originally set to be given 3 months from final rules being made to comply with the CP proposals, this has now been extended to 6 months. The main risk warning rules will however come into effect within four months of PS22/10.
“The PS…contains our final strengthened rules for firms when communicating or approving financial promotions. These rules are a key part of delivering our Consumer Investments Strategy. The strategy sets out our plan to deliver a consumer investment market that works well for people who want to invest with confidence, save for planned and unexpected life events and for the businesses in the real economy for which it provides essential funding.”