The Financial Conduct Authority (“FCA”) has published its discussion paper DP21/1 regarding the strengthening of its financial promotion rules for high-risk investments and firms approving financial promotions.
THE FAC’s WIDER INITIATIVES
DP21/1 forms part of the response to the FCA’s wider call for input on consumer investments, which closed in December last year.
According to the FCA, a key theme in responses to its call last year 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. The FCA is concerned that for high-risk investments a good financial promotion, i.e. one that complies with existing rules, may not be enough to ensure that consumers are adequately protected. A financial promotion may meet the FCA’s current requirements to be fair, clear and not misleading, but the underlying investment may nevertheless be inappropriate for many investors and not meet their needs. Consequently, the FCA is looking at making changes to its financial promotion rules to apply further protections to consumers.
THE CONSULTATION PAPER
The discussion paper requests views on the following three potential areas for change, in order to better protect consumers from harm:
Classification of high-risk investments: the classification of an investment determines the level of marketing restrictions applicable to it. The FCA wants to ensure that its rules capture 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 for views on:
- whether there are any investments which are not subject to marketing restrictions which should be; and
- on potential changes to the current classification of certain types of investments and consequently the level of marketing restrictions that apply to them.
Market segmentation: despite the restrictions on marketing, the FCA is concerned that too many consumers are investing in inappropriate, high-risk investments. The FCA is planning to strengthen its rules to further segment high-risk investments from the mainstream market. The FCA is therefore seeking views on:
- what can be done to strengthen the investor categorisation process where access to a financial promotion is restricted to certain types of investors;
- what are the most effective improvements that can be made to risk warnings; and
- how can the FCA most effectively introduce more ‘positive friction’, i.e. consumers being slowed down on their purchasing journey into high-risk investments, but do not find it a negative experience.
Responsibilities of firms approving financial promotions: financial promotions are approved by firms under section 21 of the Financial Services and Markets Act 2000 (“FSMA”). As such, these firms play a fundamental role in ensuring promotions meet the requisite standards. The FCA is considering whether there should be greater ongoing maintenance requirements for these firms, ensuring promotions remain compliant, even after approval.
A full response to the call for input will be published later this year, along with the FCA’s next steps on its wider consumer investment strategy, and the second summary of work done in the previous financial year to tackle harm in the consumer investment market. DP21/1 is, however, being issued now given the importance of addressing the perceived harm from high-risk investments. The FCA plans to use DP 21/1 to help suggest rule changes which will be consulted on at the end of this year.
The FCA requests any comments to DP21/1 to be received by 1 July 2021.
To review the FCA’s consultation paper, please click here.
For more information, and any guidance or advice on financial promotion rules Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.