Introducing New Rules on Financial Promotions

The Financial Conduct Authority’s (FCA’s) rules on financial promotions are most likely to be tested in the CII’s R01 and CF1 exams.

The FCA’s proposed new rules on financial promotions are expected to come into effect in Summer 2022, once the draft rules as outlined in CP22/2 are finalised.

CP22/2

In CP22/2, the FCA is proposing changes in a number of key areas, including:

• their classification of high-risk investments
• the consumer journey into high-risk investments
• strengthening the role of firms approving and communicating financial promotions
• applying their financial promotion rules to qualifying cryptoassets

FCA rationale

In implementing these changes, the FCA believes it is addressing the harm consumers may experience when investing in high-risk investments that do not match their risk tolerance, protecting them from unexpected and significant losses and undermining wider confidence in investments, making it harder for all firms to raise capital.

While they have stated that they do not want to restrict consumers who want to invest, they do want them to be able to identify and access investments that suit their circumstances and attitude to risk.

Key changes

As this is only a consultation paper, the draft rules are not set in stone and so could change prior to the final rules depending on the feedback the FCA receives. However, notable new rules include:

• requiring firms that approve and communicate financial marketing to:
  • have relevant expertise and understanding of the investments being offered;
  • improve risk warnings on adverts; and
  • ban incentives to invest, e.g. ‘new joiner’ or ‘refer-a-friend’ bonuses.
• requiring consumers to watch educational videos before they can invest;
• introducing deposit collection and investment frictions such as cooling-off periods or requiring text message confirmations before investments are made; and
• introducing restrictions on the marketing of cryptoassets, in preparation for the Government bringing the promotion of these high-risk investments under its remit.

A word on cryptoassets

The FCA intends to categorise qualifying cryptoassets as ‘Restricted Mass Market Investments’. Consumers would then only be able to respond to cryptoasset financial promotions if they are classed as restricted, high net worth or sophisticated investors.

Firms issuing such promotions would have to adhere to FCA rules, including the requirement to be clear, fair and not misleading.

The FCA said it is proposing to require that all financial promotions for ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments’ contain a risk warning which says:

“Don’t invest unless you’re prepared to lose all your money invested. This is a high‑risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2 mins to learn more.”

Section 21 Approvers

Finally, the FCA also wants to strengthen the role of ‘section 21 approvers’, who approve financial promotions for unauthorised people and check for compliance with the FCA’s rules.

Summary

The FCA said the measures were a central element of its Consumer Investments Strategy which aims to give consumers the confidence to invest and reduce the number of people who are investing in high-risk products that are not aligned to their needs.

You can find out more about the Consumer Investments Strategy here.

To view CP22/2 in full visit this page.

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