FCA publish essential reading for firms promoting high-risk investments
On 27 September, FCA published the findings of its review into firms promoting high-risk investments to retail consumers. Whilst the review focussed on firms in the Peer to Peer and investment-based crowdfunding sector, the FCA have clearly stated it expects all firms promoting high-risk investments (RMMIs and NMMIs) to consider the findings of the review for their businesses.
The review follows the recent introduction of the new rules for firms promoting high-risk investments to retail clients (PS22/10) which went live in a phased approach in December 2022 and February 2023. These rules are not always easy to interpret or implement from a practical perspective and we do see firms fail to understand differences between RMMIs and NMMIs.
Specifically, the review assessed the approach of the firms to each of the conditions set out in COBS 4.12A:
incentives to invest
cooling off period
risk warnings
client categorisation
appropriateness
The FCA found examples of good and bad practice in each of these areas and firms would be remiss if they did not take note. We have summarised the findings of the review below. If this prompts concern you are not fully complying and you’d like assistance, do get in touch.
Incentives to invest
Good Practice:
• strong processes for oversight of any investor benefits which are exempt under COBS 4.12A.7R(2) to ensure that they are limited to products or services that are genuinely produced or provided by the investee firm
Bad Practice:
• not properly considering the full range of incentives offered by the firm against the ban, particularly those that are not paid immediately on sign up or that don’t require a consumer to invest to qualify.
Cooling off period
Good Practice:
• Giving clear information that there is a cooling-off period, and the reason for the cooling-off period.
• Giving clear information once the cooling-off period has ended.
• Blocking the consumer from being able to view investment opportunities during the cooling-off period to allow consumers to make a considered decision on whether to proceed.
Bad Practice:
• Giving clear information that there is a cooling-off period, and the reason for the cooling-off period.
• Giving clear information once the cooling-off period has ended.
• Blocking the consumer from being able to view investment opportunities during the cooling-off period to allow consumers to make a considered decision on whether to proceed.
Risk warnings
Good Practice:
• Giving clear information that there is a cooling-off period, and the reason for the cooling-off period.
• Giving clear information once the cooling-off period has ended.
• Blocking the consumer from being able to view investment opportunities during the cooling-off period to allow consumers to make a considered decision on whether to proceed.
Bad Practice:
• Changing the wording of the risk warnings to deviate from the wording prescribed in the rules.
• The risk warnings not meeting prominence requirements or including design features that reduce the prominence of the risk warnings.
Client categorisation
Good Practice:
• Changing the wording of the risk warnings to deviate from the wording prescribed in the rules.
• The risk warnings not meeting prominence requirements or including design features that reduce the prominence of the risk warnings.
Bad Practice:
• Consumers who indicate they do not meet the criteria for any of the available categories are invited to repeat the categorisation, rather than being informed that the investment is probably not appropriate for them.
• Pushing or leading consumers through the categorisation process by suggesting responses that meet the criteria of the category instead of allowing the consumer to volunteer the information.
• Pre-categorising consumers by assuming a category based on information already given to the firm and immediately placing the consumer into this category.
• Re-naming the categories or describing the categories in a way that downplays the risks of investing.
Appropriateness
Good Practice:
• Approaching the design of the assessment holistically with its overall purpose in mind – ensuring the assessment delivers a fair and objective outcome.
• Where the firm has altered the risk summary to be more suitable for the RMMI offered, the topics of these alterations are covered in the assessment.
• Where the firm has amended the risk summary to include specific features of the RMMIs offered by the firm, the appropriateness assessment includes questions that cover these features.
• Re-assessing consumers who registered with the firm before 1 February 2023 but have not yet invested in the RMMI.
• Giving consumers access to relevant resources to be able to research and understand the products and risks.
• Having a limit on the number of times a consumer can ultimately attempt the assessment before being told that the RMMI is likely to be inappropriate for them.
Bad Practice:
• Asking leading or simplistic questions that direct the consumer to the correct answer.
• Assessments do not cover all appropriate points outlined in the relevant COBS 10 Annex, or aspects of the RMMI that the firm has added to the risk summary.
• Where the assessment questions are selected randomly from a bank of questions, not ensuring that all relevant topics are covered in every iteration of the assessment.
• After two failed assessments not including at least a 24-hour cooling off period after every subsequent assessment.
• Where the assessment does not require all questions to be answered correctly, the consumer is able to incorrectly answer questions that fundamentally show that the RMMI as not appropriate for them, yet they are able to pass the assessment.
• The consumer is able to reasonably infer the correct answer to the question, see examples above.
• Firms do not have robust processes in place for consumers who contact the firm to request answers to the assessment questions or to circumvent any lock outs.
• Staff are inadequately trained to consistently and robustly review assessments where the firm must manually score them.