On 1st December 2022, the rules regarding the issuing of financial promotions on high-risk products will become stricter as the Financial Conducts Authority’s (FCA) new regime comes into effect (FCA’s Policy Statement 22/10: “Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions”). The FCA is introducing a new classification of investment products and new restrictions on financial promotions targeting retail clients with higher-risk products.
Apart from the new rules on high-risk products, from 1st February 2023, the FCA will also be revising the declarations for the High Net Worth and Certified/Self-Certified Sophisticated Investor Statements and the requirements around Appropriateness Assessments.
The FCA’s new governance framework has signalled that the regulator is taking a stricter approach to high-risk products, placing consumer awareness and protection at the heart of this approach.
Why is the FCA Changing the Rules?
The change in the rules around issuing financial promotions on high-risk products results from the FCA’s consumer research. The research indicated that too many retail investors are investing in high‑risk products that do not match their risk tolerance, leading to unexpected and significant losses. This is detrimental to retail investors but can also make it harder for firms to raise capital due to the decreased confidence that investors may experience in the market.
Hence, the FCA’s package aims to safeguard retail investors by ensuring they understand the risks before investing in high-risk products and are provided with adequate information to make informed investment decisions.
Which type of Promotions and Investment Products will be Impacted?
The new framework classifies financial promotions and investment products into three distinct categories, namely Non-Mass Market Investments (NMMI), Restricted Mass Market Investments (RMMI), and Readily Realisable Securities (RRS).
- NMMIs consist of non-mainstream pooled investments and speculative illiquid securities. According to FCA rules, mass marketing of NMMIs to retail clients will not be allowed. This implies that mass marketing on hedge funds, other underregulated collective investments, or speculative mini-bonds are not allowed.
- RMMIs consist of non-readily realisable securities (NRRS), Peer-to-Peer (P2P) agreements and portfolios, and qualifying crypto-assets. Subject to certain restrictions mass marketing to retail investors will be allowed.
- Readily Realisable Securities consist of Listed or exchange-traded securities, such as shares or bonds traded on the London Stock Exchange.
Will the New Rules have an Impact on Crypto-assets?
Currently, crypto assets are not subject to the FCA’s rules on financial promotions as they are not regulated financial products. However, the Treasury confirmed earlier this year that they intend to bring crypto assets into the scope of the financial promotions regime when parliamentary time allows.
The FCA has also stated that the final rules on qualified crypto assets will be broadly consistent with those for RMMIs.
What are the Key Changes relevant for Firms offering High-risk Products?
- The simplification of the FCA’s restrictions on high-risk products through the introduction of categories for certain products.
- The introduction of high-risk warnings, the banning of inducements to invest, improving client categorisation, and more in-depth appropriateness tests aiming to assist retail investors when dealing with high-risk investments.
- Firms will have an enhanced role in approving and communicating financial promotions. The framework also aims to ensure that firms have the appropriate competence and product expertise to communicate financial promotions.
- Firms approving a financial promotion from third parties must require, from that unauthorised person, a written quarterly attestation confirming that no material change is required to the promotion or an explanation of the circumstances in which compliance with the rules might change.
- In the case of NMMI, Self-Certified Sophisticated, and High Net Worth Investors requesting to view a financial promotion must be subject to a preliminary suitability assessment.
- Firms must maintain a record for at least five years on the outcome of client categorisation, the number of consumers who did not proceed with the consumer journey and the result of the appropriateness assessment of a consumer.
How will the New Changes Affect Firms?
Firms that are involved in the promotion of high-risk investments to their existing or prospective clients would need to review their processes to comply with the rules and undertake the following actions:
- Identify products that fall within the scope of the FCA’s newly introduced classification system.
- Review their distribution lists/CRM for NMMI and proceed to the removal of any ineligible retail contacts.
- Prescribe a risk warning for any promotions that fall under the scope of the FCA’s requirements.
- Ensure that procedures (e.g., distribution lists/CRM, email templates, websites etc.) comply with the positive frictions, client organisation, and appropriateness tests.
How can Complyport help?
If this article has raised any questions about the upcoming changes to the rules regarding the issuing of financial promotions on high-risk products, or you think your firm may require assistance, please contact Jan Hagen via jan.hagen@complyport.co.uk to book a free consultation.
About Complyport?
Complyport is a market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.
We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.
Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.
