Blog

What has happened?

Following feedback to its Call for Input on Consumer Investments, the FCA has in April 2021 published proposals to strengthen its financial promotion rules for high-risk investments in order to help retail investors make more effective decisions. The discussion paper, DP 21/1, seeks views on three areas where changes could be made to address harm to consumers arising from investing in inappropriate high-risk investments.

What do you need to do?

The feedback to this DP will help shape the rules that the FCA plans to consult on later in the year and ensure they are feasible for firms to implement and that they have the intended impact. The three identified areas of focus are the classification of high-risk investments, the segmentation of the high-risk investment market and the responsibilities of firms that approve financial promotions.

The classification of high-risk investments: The FCA’s classification of investments determines the level of marketing restrictions that applies to that investment. The FCA is now seeking views on whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply, for example, to equity shares and P2P agreements.

The FCA is considering including equity shares as a type of security that can be a Speculative Illiquid Security (an SIS), alongside debentures and preference shares. Where equity shares are issued for lending, buying or acquiring investments or for buying or funding the development of property, they would be subject to the mass marketing ban.

Where a P2P agreement has similar features to an SIS (for example where it is a loan to a property developer) there is the possibility for arbitrage as a property developer could seek retail investment through a P2P platform instead of issuing a mini-bond, and this P2P agreement could still be mass-marketed (subject to the COBS 4.7 rules). The FCA is seeking views on whether (and why) the existing requirements for P2P platforms are adequate to protect retail investors from the risks of P2P agreements which share features with SISs or whether the mass marketing ban should be extended to P2P agreements which have the relevant features of an SIS.

Further segmenting the high-risk investments market: The FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. Therefore, the FCA plans to strengthen its rules to further segment high-risk investments from other investments and is seeking views on how best to achieve this. It is considering, for instance, what improvements could be made to risk warnings, which are often perceived as “white noise” to many investors and often do not convey the genuine possibility of an investment loss.

The approval of financial promotions: Firms that approve financial promotions for unauthorised persons under Section 21 play a key role in ensuring those promotions meet the standards expected. The FCA is seeking views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.

The FCA is inviting feedback on its discussion paper by 1 July 2021. It will consider the feedback received alongside further analysis and testing, and it intends to consult on COBS rule changes later this year.

How can we help you?

If you’d like to know more about how we can help you with your financial promotions or section 21 signoff arrangements, or any other regulatory compliance issues, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.