United Kingdom (and EU regulation)

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

By Simon Lovegrove (UK) and Matthew Gregory (UK) on April 30, 2021 Posted in Regulation and compliance, United Kingdom

Introduction

On 29 April 2021, the FCA published Discussion Paper 21/1: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions (DP21/1).

DP21/1 follows the FCA’s Call for Input on the Consumer Investment Market which closed on 15 December 2020. This followed the announcement, as part of the FCA Business Plan 2020/21, that consumer investments would be a priority for the FCA. Central to achieving this aim is addressing the harm to consumers from investing in inappropriate high‑risk investments which do not meet their needs. A key theme in responses the FCA received to the Call for Input was the need to further segment high‑risk investments from the mainstream market, and to further disrupt consumers from investing in inappropriate investments that do not meet their needs.

High risk investments

The issues that the FCA discusses in DP21/1 primarily relate to financial promotions for high-risk investments. The FCA explains what it means by high-risk investments in paragraphs 2.18 to 2.29 in DP21/1. In summary, the FCA considers any investment which is subject to marketing restrictions under its rules to be a ‘high-risk investment’. This includes non-readily realisable securities (NRRSs), peer-to-peer (P2P) agreements, non-mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs).

Three areas of focus

In DP21/1 the FCA focuses on 3 areas where changes could be made to address harm to consumers from investing in inappropriate high-risk investments:

Classification of high‑risk investments (chapter 3 of DP21/1). The FCA’s classification determines the level of marketing restrictions that apply to an investment. The FCA wants to ensure that it captures all investments that pose the highest risk to consumers and that investments with similar characteristics are treated in a similar way to prevent arbitrage. The FCA is therefore asking whether there are any investments which are not subject to marketing restrictions which should be. The FCA is also asking for views on potential changes to the current classification of certain types of investments and consequently the level of marketing restrictions that apply to them. For example to prevent opportunities for arbitrage in the context of FCA rules for SISs and potential changes to the definition of an RRS for the purposes of its financial promotion rules.
Further segmenting the high‑risk investments market (chapter 4 of DP21/1). The FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high‑risk investments which do not meet their needs. Therefore, the FCA plans to strengthen its rules to further segment high‑risk investments from the mainstream market. The FCA is seeking views on certain aspects of this. For example, what can be reasonably done to strengthen the investor categorisation process where access to a financial promotion is restricted to certain types of investor? What are the most effective improvements the FCA can make to risk warnings? And how can the FCA most effectively introduce more ‘positive friction’ into a consumer’s journey for high‑risk investments?
The role of a section 21 approver (chapter 5 of DP21/1). Section 21 approvers approve financial promotions for unauthorised persons and check for compliance with FCA rules. Given the key role that they play in ensuring that financial promotions meet the standards the FCA expects, the FCA thinks that they should also have clear responsibilities to ensure compliance on an ongoing basis. The FCA is asking for views on what these responsibilities should look like.

Deadline and next steps

The deadline for comments on DP21/1 is 1 July 2021.

Separately, the FCA will publish a full response to the Call for Input, together with the next steps of its wider consumer investment strategy, later in the year. Alongside this, the FCA will also publish the second summary of its work to tackle harm in the consumer investment market, covering its activities up to the end of the financial year 2020/21.