Are you ready for the new financial promotion rules for high-risk investments?

What is the new development?

FCA recently published the policy statement (PS22/10) amending the rules relating to financial promotions of high-risk investments (HRIs). HRIs include:

• Non-mainstream pooled investments (NMPI) e.g. funds structured as Limited Partnerships. Under the new rules, these are re-categorised as Non-Mass Market Investments (NMMIs).

• Speculative illiquid securities (SIS) e.g. ‘mini-bonds’ and non-readily realisable securities (NRRS) e.g. unlisted shares or bonds. Under the new rules, these investments are re-categorised as Restricted Mass Market Investments (RMMI).

Read it here

Who does it impact?

Firms issuing promotions (or approving promotions) of high-risk investments to retail investors (including High Net Worth / (self)-certified investors) under the rules in the FCA COBS sourcebook will be the most affected. Financial promotion procedures and processes are likely to need significant updates and changes to incorporate the new rules.  

However, there is risk of ‘regulatory arbitrage’ currently as firms (and unregulated entities) can opt to avoid many of the onerous requirements if using exemptions in UK legislation instead. This is due to the fact that financial promotions issued using exemptions in the Financial Promotions Order (FPO) or Promotion of Collective Investment Schemes (PCIS) Order are exempt from the more onerous requirements in COBS 4.12A/COBS 4.12B. However, firms communicating promotions this way will still need to take care to follow the requirements of the exemptions and ensure other FCA rules (e.g. on record-keeping) are complied with. And this may only be a temporary option, as HM Treasury could make changes to UK legislation and close the gap.

What do firms need to do?

As a first step, we’d suggest firms:  

·        Review the products offered and understand how they will be categorised under the new categories of high-risk investments

·        Understand how the firm currently promotes its products (i.e. via FCA exemptions or those in UK legislation)

Firms may then need to:

·        Update relevant policies and procedures (such as Client Onboarding, Financial Promotions and Appropriateness) to account for the new rules

·        Provide training to staff on the new rules

·        Identify promotional material in need of updating and make the required changes

·        Liaise with IT to implement the changes where you issue digital financial promotions or where the investment journey takes place online

ComplyCraft can help with all of the above. Please get in touch if you need any assistance.

What are the changes?

Changes under the new FCA rules include:  

• Section 21 approvers: Firms that approve financial promotions for unauthorised firms must assess whether it has the necessary competence and expertise in the product or service being marketed. They must also include a time/date stamp on the financial promotion and carry out ongoing monitoring to ensure the promotion remains compliant. 

• Banning inducements to invest: Financial promotions for high‑risk investments must not contain any monetary and non‑monetary benefits that incentivise investment activity, such as “refer a friend” or new joiner bonuses.

• Prescribed and personalised risk warnings:

  • A prescribed risk warning must be prominent in all promotions of RMMI and RMMI: “Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.”

  • Promotions must also include / link to a ‘risk summary’, which again takes a standard form prescribed by the FCA.

  • Additionally, where a client is investing in a RMMI or NMMI with the firm for the first time, they must be shown a personalised risk warning (using the name of the client) at a specific point during the customer journey.

• ‘Positive frictions’ in the customer journey: In addition to the personalised risk warning pop-up, firms will need to implement a 24 hour colling off period for first time investors. The FCA’s expectation is that firms will implement these proposals as part of a consumer on‑boarding journey alongside any other checks the firms may complete such as AML/KYC checks.

• Stronger client categorisation processes: Customers will need to state why they believe they meet the relevant criteria of a client category (such as high net worth or sophisticated) and Firms will need to check the evidence stated by the client. For example, the income/net asset amount stated is above the relevant threshold and that the company stated does in fact exist.

• Stronger appropriateness tests: Appropriateness rules for RMMIs, which apply for all non-advised sales to retail investors, are being strengthened.  For example, where a consumer ‘fails’ the assessment and opts to re-take, firms will be required to ask different questions and if after a second attempt, the client does not ‘pass’, the firm must ensure 24 hours lapses before they can undergo the assessment again.  

• Record-keeping requirements: Firms will need to record multiple new data points, including: the outcome of client categorisation (such as the number of consumers categorised as high net worth etc and the reasons for meeting such criteria) and the outcome of the appropriateness test (such as the outcome of the test and the number of times investors were subject to assessment). FCA have decided to introduce fewer record-keeping requirements than originally proposed, on the basis that many of the other data points consulted on should be collected under the Conduct Duty.

When do the changes come into effect?

Rules related to risk warnings for HRI financial promotions will apply from 1 December 2022. All other rules will have effect from 1 February 2023.