The U.K. Financial Conduct Authority has published its final Policy Statement and Rules on financial promotions of high-risk investments and firms approving financial promotions. Many of these changes address or build upon recommendations of the Gloster Report or are otherwise related to the fallout from the London Capital & Finance plc scandal. The rules on risk warnings for financial promotions of high-risk investments will apply from December 1, 2022, and all other rules will apply from February 1, 2023. The FCA’s related guidance (which is included in Annex 2 of the Policy Statement) will also apply from February 2023.
The FCA is making some changes to the rules on which it consulted. We highlight some of these changes in the summary of the new rules here.
Changes to Rules for High-Risk Investments
The FCA is proceeding to organize the applicability of its conduct of business rules by reference to three kinds of investments:
- Readily Realizable Securities, which are listed and/or exchange traded securities, for which no additional marketing restrictions apply.
- Restricted Mass Market Investments, which are Non-Readily Realizable Securities (NRRS), and Peer-to-Peer (P2P) agreements for which marketing to retail investors will be allowed subject to restrictions. Acknowledging the concerns expressed by respondents to the consultation that not all RMMI have the same risk profiles, the FCA is introducing different requirements for certain products as well as adjusting the guidance on its expectations of appropriateness assessments. The rules will also clarify that the marketing restrictions generally do not apply to promotions of investments issued by local authorities, in line with the exemption in the Financial Promotion Order.
The intention is to include qualifying crypto-assets; however, the FCA will wait for legislation to be laid to bring these within the Financial Promotion regime before it changes its rules.
- Non-Mass Market Investments, which are Non-Mainstream Pooled Investments (NMPI) and Speculative Illiquid Securities (i.e., including speculative so-called “mini-bonds”) for which marketing to retail investors will be prohibited.
HM Treasury has separately announced that it plans to bring in legislation to close the apparent lacuna in financial regulation and the prospectus regime for non-transferable securities (which make up much of the third category listed above). In a consumer context, it is now in any event questionable whether such products are lawful or represent an extant grouping, following the finding that non-transfer clauses which characterise such securities are unenforceable under the Consumer Rights Act 2015, in a piece of LCF related litigation, R (Donegan) v Financial Services Compensation Scheme Limited  EWHC 760 (Admin). In the meantime, these FCA rules tighten further the restrictions on such products.
Strengthening Rules to Enhance Consumer Protection
The financial promotion rules for Restricted Mass Market Investments and Non-Mass Market Investments are being changed, including:
- Setting rules for how risk warnings should be displayed and prescribing the text to be used for risk warnings for all financial promotions. The main risk warning has been shortened, and the FCA will allow alternative risk warnings for P2P agreements and portfolios, as well as cases where the activity of the product issuer or provider could be covered by the Financial Services Compensation Scheme.
- Prohibiting inducements to invest from all financial promotions for high risk investments, which will include banning the promotions from having any monetary and non-monetary benefits that incentivize investment activity. There will be an exemption for issuers raising funds via a crowdfunding platform where the issuer offers its own “real economy” products and services as inducement, such as discounts on their products.
- Adding two positive frictions for first-time investors with a firm, the first being a personalized risk warning pop-up and the second a 24-hour cooling off period.
- To align the rules with HM Treasury’s proposal to change the requirement for a firm to “believe on reasonable grounds” that the individual has signed the relevant investor statement to one where a firm is required to reasonably believe that an individual is a high net worth individual or self-certified sophisticated investor.
- Enhancing the appropriateness tests for Restricted Mass Market Investments by introducing guidance on the types of questions to be covered by appropriateness assessments and to discourage binary answers.
Enhancing the Rules Applicable to Authorized Firms Approving the Financial Promotions of Unauthorized Firms
HM Treasury is implementing the regulatory gateway for the approval of financial promotions of unauthorized firms as part of the Financial Services and Markets Bill. This will mean that authorized firms will be banned from approving financial promotions of unregulated firms and will need to apply to have the prohibition removed in whole or part before they are able to approve financial promotions of unauthorized firms.
The FCA is also amending its rules on the approval of financial promotions of unauthorized firms by authorized firms, including, among other things, to require:
- All relevant financial promotions to include a date stamp and name of the approver. Alternative formats will be permitted if space on the financial promotions dictates that this is necessary.
- Firms to self-assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a financial promotion. A firm would need to consider whether it has the relevant experience and/or qualifications in the sector as well as the previous employment history and qualifications of the individuals responsible for approving promotions.