Defining high-risk investments

HMT / FCA are reviewing legislation and rules for financial promotion. What’s next?

The FCA consider an investment subject to marketing restrictions is generally a ‘high‑risk investment’. This includes non‑readily realisable securities (NRRSs), peer‑to‑peer (P2P) agreements, non‑mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs).

This will include products such as Enterprise Investment Schemes offered by managers in the UK (or other tax advantageous products such as BPR funds) which operate as collective investment undertakings.

The FCA is concerned that - even with high quality financial promotions - consumers are still investing in products which are unsuitable from them. Hence recent restrictions (SIS/CFD and FX products) in specific areas of concern.

HMT is still consulting on amendments to the financial promotion regime which could make approving financial promotions itself a regulated activity. Such is the concern with inappropriate promotions being approved without appropriate oversight.

There are three areas the FCA will likely consult on strengthening the rules following Discussion Paper 21/1. The classification of high‑risk investments, further segmenting this sector (raising the bar) and the responsibilities of firms who authorise financial promotions.

Firms promoting higher risk products to retail investors should be concerned with the first two areas. The FCA ask if there are additional investments which should be subject to marketing restrictions, and if they should increase restrictions and/or enhance the rules to provide greater protection to consumers.

Any firm who promotes products under COBS 4.7 or COBS 4.12 (or COBS 4.14) or relies on exclusions should review the paper and respond accordingly.

Read the Discussion Paper here.