[co-author: Antony Vitanov]
On 29 April 2021, the UK Financial Conduct Authority ("FCA") published a discussion paper (DP21/1) seeking consultation on proposals to amend the financial promotion rules. The consultation mainly seeks feedback in relation to three key areas (i) the classification of high-risk investments; (ii) the further segmentation of the high-risk investments market; and (iii) the responsibilities of section 21 approvers who approve financial promotions for unauthorised persons and check for compliance with FCA rules. The FCA invites the submission of comments by 1 July 2021 and intends to consult on proposed rule changes later this year.
In this OnPoint we briefly summarise what the FCA is seeking to achieve in the three key areas of feedback sought:
Classification of high-risk investments and their segmentation in the market
In summary, the FCA views any investment which is subject to marketing restrictions under FCA rules to be "high-risk", which includes non-readily realisable securities, peer-to-peer agreements, non-mainstream pooled investments and speculative illiquid securities.
In relation to re-classifying high-risk investments, the FCA is seeking responses to two key questions, namely: (i) whether there are any investments which are not currently subject to the marketing restriction rules, but should be; and (ii) whether the FCA should change how certain types of investments are classified under the financial promotion rules and change the level of applicable restrictions.
In relation to further segmenting the high-risk investment market, the FCA is focusing on (i) strengthening categorisation of retail investors (as high net worth, sophisticated or restricted); (ii) improving risk warnings to help retail investors better understand and engage with them; and (iii) adding "positive friction" to consumer's investment journey when making such investments, which could lead to more effective decisions.
Changes to the role of section 21 approvers
As a reminder, section 21 of the Financial Services and Markets Act 2000 provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or to engage in claims management activity unless the promotion has been made or approved by an authorised person or it is exempt.
Firms that choose to carry out such approvals ("approvers") must ensure the promotion meets the FCA's financial promotion rules when they approve it, both in substance and presentation.
In July 2020, HM Treasury published a consultation on the regulatory framework for approval of financial promotions, which outlined plans to introduce a gateway for firms to be able to approve financial promotions for unauthorised persons. If the gateway is introduced, the FCA considers that this would improve the quality of approved financial promotions as the approvers would only be able to make approvals in areas where they have been evaluated as having the right expertise. The FCA deems that it would also be better placed to supervise the relevant groups of firms that can approve financial promotions.
In addition, the FCA is considering introducing more prescriptive ongoing monitoring obligations on approvers after they have approved a communication. The current rules require the approvers to withdraw their approval if they become aware that the financial promotion no longer complies with the FCA rules. The FCA considers that ongoing monitoring obligations would better place approvers to assess whether they need to withdraw consent, but this also adds a further burden and potential costs on these firms.
Proposed ongoing monitoring requirements for approvers may include checking (i) whether any amendments have been made, which would require re-approval of the financial promotion; (ii) whether the promotion continues to be fair, clear and not misleading; (iii) whether the funds raised via the promotion are used for the purposes stated in the same; and (iv) whether any requirements (FCA-imposed or otherwise) are being complied with.