DP 21/1 – strengthening financial promotion rules for high-risk investments

The FCA has published a discussion paper on strengthening financial promotion rules for high-risk investments and firms approving financial promotions.

Following feedback to its Call for Input (CFI) on Consumer Investments which closed in December 2020, the FCA has published discussion paper DP21/1 which outlines proposals to strengthen financial promotion rules for high-risk investments. The intention is to help retail investors make more effective decisions.

The regulator previously banned the mass-marketing of speculative mini-bonds and wishes to continue to address harm in the high-risk investment market through ongoing supervisory and enforcement action. The latest proposals are intended to reduce the risk of investors taking on inappropriate, high-risk investments that they don’t understand, and don’t meet their goals and/or needs.

Even where a financial promotion may meet the FCA requirement of being fair, clear and not misleading, the underlying investment may still not be appropriate.  Therefore the FCA is looking to make changes to the Financial Promotion rules to ensure further protection for investors, while, at the same time, helping them to make more effective decisions.

Views sought

The FCA is seeking views in three areas:

  • Classification of high-risk investments – the classification of an investment determines the level of marketing restrictions that apply. The FCA want to ensure that all investments posing the highest risk to investors are captured and that investments with similar characteristics are treated in a similar way to prevent arbitrage. The FCA is asking for views as to whether there are any investments which are not subject to marketing restrictions which should be and what restrictions should apply, and also on potential changes to the current classification of certain types of investments.
  • Segmentation of the high-risk investment market – the FCA is planning to strengthen its rules to further segment high-risk investments from other investments. The FCA is seeking views as to 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 that can be made to risk warnings, and how the FCA can most effectively introduce more ‘positive friction’ into an investor’s journey for high-risk investments. Other suggestions in the paper include requiring investors to watch educational videos or to pass an online test to demonstrate sufficient knowledge about financial products. This could help prevent them from simply clicking through and accessing high-risk investments they do not understand.
  • Responsibilities of firms when approving financial promotions – Section 21 of FSMA 2000 allows authorised firms to approve financial promotions on behalf of unauthorised persons, thereby undertaking a key role in ensuring that those promotions meet the required standards. The FCA believes firms should have clear responsibilities to ensure compliance on an ongoing basis and is inviting views on what these responsibilities should look like.

Whilst a full response to the CFI will be published later in 2021, DP21/1 has been made available now given the importance of addressing the perceived harm from high-risk investments. The FCA will examine the reactions to the paper alongside further analysis and testing and plans to use DP 21/1 to help suggest rule changes which will be consulted on later this year.

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

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Action Required By You

Firms wishing to comment on the proposals should do so by 1 July 2021.
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