Marketing high-risk investments Q&A
This Q&A contains important information on the new rules made by the Financial Conduct Authority (“FCA”) to its principles and on the promotion of marketing high-risk investments. This memorandum also reminds firms of the proposed rules and guidelines made by the HM Treasury (“HMT”) to the financial promotion exemptions.
These rules primarily impact businesses that are:
- Interacting with consumers and retail investors;
- marketing opportunities to High-Net Worth Investors, Sophisticated Investors and other investors that are not categorised as Professional Investors.
This memorandum covers the following publications:
- FCA Policy Statement 22/10: Strengthening our financial promotion rules for high-risk investments.
- HMT Financial Promotion Exemptions for High-Net-Worth Individuals and Sophisticated Investors.
The timing of the implementation of the new rules are set out in each section.
To download the PDF version of this Q&A, please click here.
How can MJ Hudson offer support?
We can help you comply with these rules with the following initiatives:
- Framework updates: we can provide you with template policies and workbooks surrounding financial promotion, customer journey flows, design and distribution of products, assessment of appropriateness and suitability.
- Training: alongside an updated policy framework, we can provide you with tailored training. Where required, we can arrange dedicated training sessions or workshops to assist you with the development and implementation of new process e.g. when developing your customer journey.
If you wish to contact us about any items in this Q&A please feel free to reach out to us, Mike Booth (Mike.Booth@MJHudson.com) / Vasco Vicini (Vasco.Vicini@MJHudson.com).
The Financial Conduct Authority (“FCA”) is acting to address concerns about the ease and speed with which people can make high–risk Investments by proposing a significant strengthening of its rules on how these products are promoted and sold to investors.
High-risk investments include:
- Restricted Mass Market Investments (“RMMI”): Non-Readily Realisable Securities (“NRRS”) (e.g. shares or bonds in a company not listed on an exchange), Peer-to-Peer (“P2P”) agreements and qualifying cryptoassets1;
- Non‑Mass Market Investments (“NMMI”): Non-Mainstream Pooled Investments (“NMPI”) (e.g pooled investments in an unauthorised fund), Speculative Illiquid Securities (“SIS”) (e.g. speculative mini-bonds).
These categorisations reflect the riskiness of the investment taking into account a variety of factors.
Readily Realisable Security (“RRS”): These are listed or exchange traded securities (e.g shares or bonds traded on the London Stock Exchange).
Other products may also be excluded because they are neither a RMMI or NMMI.
There are two material changes.
A. Risk warning
There must be a sufficiently prominent risk warning on the financial promotion. The FCA has specified what these are. The standard risk warning will be:
“Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investments and you are unlikely to be protected if something goes wrong.”
The FCA has prescribed how the risk warning should appear on website and mobile communications. It should:
- be statically fixed and visible at the top of the screen, below anything else that also stays static, even when the retail client scrolls up or down the webpage; and
- be included as described above on each linked webpage on the website or page on the application relating to the Non-Mainstream Pooled Investment
The illustration below shows a summary of risk warnings and alternatives available.
In certain cases, the risk warning should be personalised to the investor.
B. Take 2 mins to learn more
The risk warning above must also include a link in the form of text saying “take 2 mins to lean more”. It should take the reader to a Risk Summary, which is of a prescribed content and format and must be:
- prominently brought to the retail client’s attention, taking into account the content, size and orientation of the financial promotion as a whole;
- clearly legible, contained within its own border and with bold and underlined text as indicated in COBS 4 Annex 1R;
- statically fixed and visible in the middle of the screen; and
- the main focus of the screen
The FCA has prescribe several versions of the context of the risk summary – it is not free form that can be edited by the firm.
The table below includes the provisions for the risk warning and associated risk summary, for digital and non-digital mediums of communications.
The FCA will make further considerations on the differentiation of risk warnings next year whilst also monitoring the efficacy of the new standard. Firms are encouraged to monitor the effectiveness of the risk warning as part of their management information monitoring under the Consumer Duty.
A personalised risk warning is only required on the first occasion that a firm, or other person communicating an approved direct offer financial promotion, communicates a direct offer financial promotion relating to a Restricted Mass Market Investment to a particular retail client.
The only personalisation required is the inclusion of the person’s name at the beginning of the warning e.g. “Tim, don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investments and you are unlikely to be protected if something goes wrong.”
There is now a 24-hour cooling-off period which starts from when the consumer requests to view the direct offer financial promotion (for Restricted Mass Market Investments) or financial promotion (for Non‑Mass Market Investments).
The purpose of this cooling-off period is to give consumers sufficient time to consider whether an investment is appropriate.
Firms will not be able to show consumers the relevant financial promotion until at least 24-hours have elapsed and the investor needs to actively consent to continue the customer journey.
However, firms can proceed with other parts of the consumer journey while the cooling-off period “applies” such as KYC/AML checks, client categorisation and the appropriateness assessment. If these other processes take more than 24-hours to complete, firms will not need to introduce an additional pause in the consumer journey. However, the consumer will still need to give their active consent that they wish to proceed with the investment.
ish to proceed with the investment.
Yes, a firm must not communicate or approve a financial promotion which relates to a Restricted Mass Market Investment, and which offers to a retail client any monetary or non-monetary incentive to invest.
Banned incentives may include things like:
- offering bonuses
- offering bonuses where the client refers another person;
- offering cashback
- offering discounts
- offering free gifts; or
- offering any additional free investments or offering discounts on investments
It is important to note that information and research tools do not constitute non-monetary incentives.
Yes, there are new formats of the High-Net-Worth and Certified/Self-Certified Sophisticated Investor Statement.
The new rules clarify that where consumers must provide their income/net assets to show they are High-Net-Worth they can provide these to the nearest £10,000/£100,000 respectively.
The FCA also clarifies expectations on the level of checks expected to be conducted by firms when categorising clients and clarifies that firms will be required to check that the evidence stated by the consumer does in fact meet the relevant criteria, for example that the income/net asset amount stated is above the relevant threshold and that the company stated does in fact exist.
Firms marketing NMMIs should also have regard to their duties under the Principles and the client’s best interests rule. In particular, a firm marketing an NMMI should take reasonable steps to ascertain that the retail client does, in fact, meet the relevant criteria.
The FCA is not requiring firms to review independent documentation to confirm that the person does in fact meet the required classification e.g. you do not need to review pay slips to confirm gross income levels.
The FCA do not believe that the existing declarations are working well and they believe that self-certification is not the right approach. Therefore, they welcome the HMT’s consultation on reforming the FPO exemptions, including the proposal that would require a firm to come to a reasonable belief that investors met the conditions of the exemptions.
A firm that has approved a financial promotion for communication by an unauthorised person must require from that person a written quarterly attestation that there has been no material change:
- to the financial promotion; or
- in circumstances which might affect the continuing compliance of the financial promotion with the financial promotion rules.
A firm must require the first attestation no less than 3 months after it approves the financial promotion; and thereafter, require attestations at least once every 3 months for as long as the financial promotion is communicated.
The appropriateness rules must be followed for all categories of retail client (namely restricted, Certified High‑Net-Worth, Certified and Self‑Certified Sophisticated Investors) for RMMIs, unless the investor is receiving advice.
Currently, the rules require that the RMMIs must be considered appropriate before a client’s application or order for RMMI, in response to a DOFP, i.e. at the time the investment is made rather than when marketed.
The new rules will expect firms to gather the information necessary to conduct the assessment, and complete its assessment, prior to the DOFP being shown.
This means that firms will be required to conduct their appropriateness assessment prior to the DOFP being shown so that they can implement this as part of their client onboarding alongside other requirements in the consumer journey such as showing the personalised risk warning, client categorisation and any AML/KYC checks that may be required.
The new rules will also require that consumers must wait until 24-hours before undertaking the appropriateness test again from their second assessment onwards.
In the case of NMMI, Self-Certified Sophisticated and High-Net-Worth Investors requesting to see a financial promotion must be subject to a preliminary assessment of suitability (unless the investor is receiving advice). A preliminary assessment of suitability, and an appropriateness assessment, are targeted towards different things. The appropriateness assessment is centred around whether the client has sufficient knowledge and experience to understand the risks of the investment. This is an important prerequisite when assessing suitability. However, the preliminary assessment of suitability means a firm goes a step further. It requires the firm to understand the client’s personal circumstances, so they can assess whether the investment is likely to meet the client’s needs and objectives.
The rules introduce requirements to record the metrics relating to client categorisation and the appropriateness assessment. Firms should already be recording this data in both online and offline settings, and it is useful for supervisory purposes. However, the FCA suggest that firms consider collecting them as part of their monitoring obligations under the Duty.
Under the ‘consumer understanding’ element of the Duty, firms will be required to monitor the impact of communications throughout the consumer journey. For example, whether consumers access additional information on risk warnings when taking out investments, and whether they act on this information. Firms will also need to assess, test, understand and be able to evidence the outcomes their customers are receiving.
Rules related to risk warnings for financial promotions of high-risk investments will have effect from 1 December 2022. All other rules will have effect from 1 February 2023.
For cryptoassets, the FCA will publish final rules for cryptoasset promotions once the relevant legislation to bring qualifying cryptoassets within the financial promotion regime has been made.
The vast majority of the new rules would not apply to excluded communications, i.e. communications which have been approved by an FCA authorised person, or it is communicated to an exempt person. These exemptions are made available through primary legislation, the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO“).
However, in order to comply with the FCA expectations on Consumer Duty, it may be prudent for firms to comply with the new rules.