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When it comes to financial promotions, the FCA wants to prevent firms from presenting risky products as appropriate, and products as regulated, when they are not.
The FCA has published its financial promotions data for 2021, which shows there were 357 more interventions leading to a promotion being removed or amended compared with 2020, despite a similar number of investigations. The rising number of interventions is reflective of the fact financial promotions are an area of increasing concern to the FCA.
Exactly what constitutes a financial promotion, and how best to regulate them is a continually evolving picture. Moreover, the profile of consumers the FCA considers to be ‘vulnerable’ has also changed.
Tech native but risk unsavvy
The financial promotions data shows the retail credit and retail investment sectors dominated the FCA’s attention, accounting for more than three-quarters (77%) of all withdrawals and amendments. This is unsurprising, as these are the types of investments younger, tech-native people are drawn to, and they are a consumer group which the FCA is increasingly viewing as vulnerable.
This demographic has been targeted before. The approach being taken by the FCA is very similar to the one taken by the Gambling Commission a few years ago – gambling companies also tend to target young and often male consumers who can easily navigate through apps. The Commission’s rules now state marketing cannot be of ‘particular appeal’ to young people, and nobody who is or appears to be under 25 can feature in gambling marketing images.
For a variety of reasons, younger people without experience of investing are attracted to certain products, and like the Gambling Commission the FCA is trying to address how these products are portrayed. When it comes to financial promotions, the FCA wants to prevent firms from presenting risky products as appropriate, and products as regulated, when they are not.
Ways to avoid promotion problems
Firms need to take extra care the content they publish does not constitute a financial promotion, given the bar for a financial promotion is low. According to the FCA handbook, it is simply any ‘invitation or inducement to engage in investment activity’. This can be the case even where the inducement to engage is with a company or entity other than the one producing the financial promotion.
Firms also need to be extremely careful when using social media, as content cannot be easily controlled once published. Every post must be ‘standalone compliant’, meaning a post cannot rely on subsequent posts to comply with financial promotion regulations. It is difficult to be absolutely clear on what a financial promotion is and how they can remain compliant, a distinction which Bovill consultants regularly help their clients establish.
Principals to firms conducting unauthorised activities should take time to fully understand what their appointed representatives (AR) are doing and will need to exercise more caution when approving financial promotions on their behalf. Principals will now be subject to more scrutiny when approving promotions, and it is likely professional guidance will be sought in order to help firms navigate the reformed process.
FCA action on high risk investments
A lot of recent work on financial promotions for high-risk assets has been done, reinforcing and improving requirements designed to protect vulnerable customers. This includes making investors wait for two minutes before completing their investment, and using clearer, more personalised language to warn of the risks of investing.
The FCA are also looking at how the Financial Promotions Exemptions Order operates. This allows non authorised companies to issue a financial promotion if the recipients fall within an exemption: exemptions include high net worth individuals and so-called sophisticated investors. Regulators are concerned these exemptions create an unacceptable loophole for bad actors. They are lobbying for the net worth amount to be increased, and for ‘self-certification’ of sophistication to be removed. As the Exemption Order is statutory, however, it is the government who would have to implement these changes.
Regulators are also looking at how to enable consumers to better distinguish between the regulated and unregulated parts of a business, so they are clearer on who they are engaging with.
Higher standards for financial firms
The FCA wants to put firms under the microscope to understand which products and services are regulated and which are not, and could even require them to have a separate entity for their unregulated business. A number of firms have already adopted this legal separation.
This lack of clarity was at the heart of the regulators’ problem with the activities of Greensill, an appointed representative (AR) performing both regulated and unregulated activities. Arising from the aftermath of this debacle is the spectre of a far more stringent AR regime, with the FCA looking at holding principals to a much higher standard when they approve financial promotions for ARs.
This article first appeared in Money Marketing