Financial promotion rules for high-risk investments tightened

8 September 2022 | UK & Europe | Articles

Updates to the financial promotion rules published over the summer are likely to constitute a significant change for many firms. In the next few months, those affected will need to review and re-classify their products and update current materials with appropriate warnings. It’s also likely to mean working with IT and other departments to review the customer journey and refreshing policies and procedures and related training.

PS22/10: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions

The FCA published the policy statement and final rules (PS22/10) in August to amend the rules relating to financial promotions of high-risk investments, or HRIs. It follows the consultation (CP22/2) which introduced some new concepts and – apart from providing some clarification and minor adjustments – the final PS is consistent with what was proposed in the CP. The rule changes will be of particular interest to the following types of firm:

• Firms which approve financial promotions for unauthorised persons.
• Issuers of non-mainstream pooled investments (for example investment funds structured as Limited Partnerships), speculative illiquid securities (for example mini-bonds) and non-readily realisable securities (for example unlisted shares or bonds). These are collectively referred to as high-risk investments.
• Investment-based crowdfunding (IBCF) platforms, loan-based peer-to-peer (P2P) platforms, and other intermediaries distributing high-risk investments to consumers.

Under the new rules, high-risk investments will be categorised as one of two types:

• Restricted Mass Market Investments (RMMIs): These will include non-readily realisable securities (NRRS), P2P agreements and qualifying cryptoassets. It’s worth noting that the rules in PS22/10 do not apply to cryptoassets and the FCA will issue updated rules covering promotions of these investments once relevant legislation to bring cryptoassets within the financial promotions regime has been made.
• Non-Mass Market Investments (NMMI): These will include non-mainstream pooled investments (NMPI) and Speculative Illiquid Securities (SIS)

Introducing stronger risk warnings

A key change under the new rules is the introduction of stronger risk warnings for all RMMIs and NMMIs. This includes the following requirements:

• Standard HRI warning: RMMI and NMMI promotions of high-risk investments (that are not P2P agreements) will need to include a standard HRI risk warning: “Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.” Firms can only remove “and are unlikely to be protected if something goes wrong” where the activity of issuing or providing the investment involves an authorised person (or an appointed representative) and could give rise to an FSCS claim.
• Risk summary: Where the promotion is communicated via a digital medium, such as a website, the standard risk warning should also include “Take 2 mins to learn more” as a link which delivers a risk summary. Where the promotion is communicated via non-digital mediums, the risk summary must be provided at the time of making the promotion. The risk summary takes a prescribed format according to the type of investment and can only be amended in limited circumstances, such as if the text is irrelevant or misleading given the nature of the investment. Where a firm amends the risk summary wording, they must record the rationale for doing so.
• Personalised risk warning: Firms will need to present consumers investing in a RMMI or NMMI for the first time with a personalised risk warning, using the name of the client. For RMMIs, this warning will need to appear before the Direct Offer Financial Promotion (DOFP). For NMMIs, this warning would need to appear before any financial promotion could be communicated. Where the promotion is made via digital channels, the risk warning should be in the form of a ‘pop-up or equivalent’. Having received the personalised risk warning, clients must be asked whether they wish to continue, or leave, the investment journey.

Changes to high-risk promotion rules

As well as the new requirements around risk warnings, the policy statement outlines several other significant changes in how firms should approach marketing high risk investments.

• ‘Positive frictions’ in the customer journey. In addition to the personalised risk warning pop-up, firms will need to implement a 24-hour cooling off period for first time investors. The FCA’s expectation is that firms will implement these proposals as part of a consumer on‑boarding journey alongside any other checks the firms may complete such as AML/KYC checks.
• Banning inducements to invest. Financial promotions for high‑risk investments must not contain any monetary and non‑monetary benefits that incentivise investment activity, such as “refer a friend” or new joiner bonuses. One change from the consultation is that the FCA will exempt “shareholder benefits” from the ban, such as discounted products or services by the firm receiving the proceeds of the investment.
• Stronger client categorisation processes. Customers will need to state why they believe they meet the relevant criteria of a client category, such as high net worth or sophisticated. Firms will also need to check the evidence stated by the client, for example, whether the income/net asset amount stated is above the relevant threshold and that the company stated does in fact exist.
• Stronger appropriateness tests. Appropriateness rules for RMMIs, which apply for all retail investors unless they receive advice, are being strengthened. For instance, the appropriateness test must be carried out before a client’s application or order for a RMMI in response to a promotion which specifies the manner of response (a Direct Offer Financial Promotion) can be processed. Where a consumer ‘fails’ the assessment and opts to re-take, firms will be required to ask different questions. If after a second attempt, the investment is still considered inappropriate, they must wait at least 24 hours to undergo the assessment again.
• Record-keeping. The FCA have decided to introduce fewer record-keeping requirements than originally proposed. These include: the outcome of client categorisation, such as the number of consumers categorised as high net worth and the reasons for meeting such criteria, and the outcome of the appropriateness test, such as the outcome of the test and the number of times investors were subject to assessment. Although the other metrics consulted on were not included in the final policy statement, the FCA noted that they should be considered by firms when considering their duties under the new Consumer Duty.
• Section 21 approvers. Firms that approve financial promotions for unauthorised firms must assess whether they have the necessary competence and expertise in the product or service being marketed. They must also include a time / date stamp on the financial promotion and carry out ongoing monitoring to ensure the promotion remains compliant.

What you need to do to comply with the new HRI rules

Rules related to risk warnings for HRI financial promotions will apply from 1 December 2022. All other rules will come into effect from 1 February 2023. The changes are likely to represent a huge shift in many firms’ financial promotions procedures. In the first instance there are four areas which any firm affected should look at.

1. Assess the products offered and determine how they will be categorised under the new classification system.
2. Identify promotion material in need of updating and determine the updated risk warnings and summaries per product/service type.
3. For firms issuing digital financial promotions or whose investment journeys take place online, engage with IT to take the appropriate steps.
4. Update policies and procedures and be ready to train individuals involved in making or issuing financial promotions.

We can help

Our team of regulatory experts can help you understand how these rules may apply to you and assess what changes you need to make to meet the new requirements. We can also help with ongoing compliance support including advice and training on financial promotions.