General

Financial Promotion Rules and FCA Consultation – The National Law Review

The FCA perceives that since the start of the COVID-pandemic there has been a rapid growth in the proportion of consumers holding high-risk investments. In response, the FCA is planning a revamp of the financial promotion regime and has recently released its consultation paper on the proposed changes.

By “high-risk investments” the FCA means investments subject to marketing restrictions under existing FCA rules, such as investment based-crowdfunding (IBCF), peer-to-peer lending investments (P2P), other non-readily realizable securities (NRRSs), non-mainstream pooled investments (NMPIs), and speculative illiquid securities (SISs). They will also include cryptoassets once they are brought within the financial promotions regime.

The FCA’s basic aim is to ensure that investments that are complex and difficult for retail consumers to understand are not marketed to them inappropriately and that promotions are clear, fair, and not misleading, bearing in mind the risks and complexities of the investments.

These are also the first proposals for the conduct of business regulation for cryptoassets in the UK, as part of a wider strategic approach developed by the Cryptoassets Taskforce.

The Consultation Paper proposals include four main areas.

Simplifying the classification of high-risk investments

First, the Consultation Paper proposes simplifying how high-risk investments are categorized by grouping products with similar characteristics into the same category so they are treated in the same way under the financial promotion rules.

To do so, the following three key categories are adopted:

Category 1 – Readily Realisable Securities (“RRS”). These address listed or exchange-traded securities and which can be marketing without restriction.

Category 2 – Restricted Mass Market Investments (“RMMI”). These incorporate NRRSs (such as shares or bonds that are not admitted to trading on a regulated market or trading venue) and P2P agreements. These can be marketed to retail customers with certain restrictions. The commonality here is the ability to mass market the products and their illiquid nature.

Category 3 – Non-Mass Market Investments (“NMMI”). These include NMPIs (e.g. pooled investments in an unauthorized fund). It also includes SISs such as debentures or preferences shares, the proceeds of which are used for on-lending, buying or acquiring investments, buying real estate, or funding the construction of a property (e.g. mini-bonds). These investments are all considered high risk and subject to the same marketing restrictions.

The consumer journey into high-risk investment

Secondly, the Consultation Paper has proposed strengthening risk warnings, simplifying the language in investor declarations, as well as requiring consumers to evidence why they meet the relevant investment criteria. The FCA has also proposed introducing new guidance on appropriateness assessments, including the type of questions to be covered, incorporating a cooling-off period if a client does not pass the assessment the first time around, and requiring firms to record data to demonstrate the effect of these measures. If adopted, firms already subject to the FCA’s financial promotion rules will need to implement these changes within 3 months from the final rules being issued.

Strengthening the role of s.21 approvers 

Thirdly, the Consultation Paper proposes changes to hold firms who approve financial promotions of unauthorized firms under s.21 of FSMA (“s.21 approvers”) to higher standards and impose broader obligations on them. In addition to a new regulatory gateway for firms approving promotions, the consultation targets three key areas of the financial promotion lifecycle:

  1. Approving and communicating promotions. The proposals include adopting rules that require financial promotions to include the date on which the promotion was approved, and obliging s.21 approver firms to self-assess whether they have the necessary competence and expertise in an investment product or service to approve the financial promotion for it. Firms will need to keep a record of how they have met the competence and expertise requirement.

  2. The lifetime of the promotion. The proposals include requiring firms to monitor financial promotions on an ongoing basis. This includes looking at, among other things, whether there have been any changes to the promotion that may affect the ongoing commercial viability of the proposition described in the promotion, whether the promotion continues to be clear, fair, and not misleading, and whether the headline rates of return in the promotion continue to be reasonably achievable. To meet this obligation, s21 approvers will have to collect attestations of ‘no material change’ from clients with approved promotions every 3 months.

  3. The consumer journey. The proposals seek to clarify the role of firms approving promotions and require s21 approvers to take reasonable steps to ensure that the relevant processes for appropriateness tests comply with the FCA rules, both initially and over the life of the financial promotion.

Applying financial promotion rules to qualifying cryptoassets

Finally, the FCA proposes to apply the same rules to qualifying crypto assets as they currently apply to RMMI. Qualifying cryptoassets will also be subject to s21 of FSMA.

Although the definition may change, currently a qualifying cryptoasset includes any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. It does not include other controlled investments, electronic money under the Electronic Money Regulations 2011, central bank money, or cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services. The financial promotion restriction will apply to any in-scope promotion capable of having an effect in the UK, even where it is communicated by an overseas person.  It also confirms that the ‘high net worth’ or ‘self-certified sophisticated investors’ exemptions will not apply to qualifying cryptoassets, although the certified sophisticated investors’ exemption will.


© Copyright 2022 Squire Patton Boggs (US) LLP
National Law Review, Volume XII, Number 80

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