Promotion of high-risk investments - the FCA consults

The FCA published its Discussion Paper DP21/1, “Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions” on 29 April 2021.

DP21/1 seeks comments on three areas where the FCA believes changes could be made to protect consumers from harm.

These are:

The classification of high-risk investments

How an investment is classified by the FCA determines the marketing restrictions that apply to it. DP21/1 asks for comments as to whether more types of investments should be subject to marketing restrictions and, if so, what form these should take.

The segmentation of the high-risk investment market

The FCA is concerned that too many consumers are investing in inappropriate high-risk investments which do not meet their needs, despite existing marketing restrictions. Among the issues the FCA is considering are:

• what can reasonably be done to strengthen the investor categorisation process where access to a financial promotion is restricted to certain types of investor;
• what are the most effective improvements that could be made to risk warnings; and
• how it can most effectively introduce more "positive friction" into a consumer's journey for high-risk investments.

The responsibilities of firms which approve financial promotions

Section 21 of FSMA 2000 allows authorised firms to approve financial promotions on behalf of unauthorised persons, thereby playing what the FCA describes as being a key role in ensuring that those promotions meet the required standards. The FCA feels that such firms should have clear responsibilities for ensuring compliance on an ongoing basis and what those responsibilities should look like.

Next steps

The consultation period for DP21/1 is open until 1 July 2021 - the FCA will use feedback received to help shape the proposals it intends to put out for consultation later in the year.

DP21/1 should not be seen in isolation – it follows a number of interventions from the FCA intended to tackle harm to investors from high-risk investments. These include:

• the consultation process on “High-risk investments: Marketing speculative illiquid securities (including speculative mini-bonds) to retail investors”, which started with the publication of CP20/8 in June 2020 and led to final rules being made in December 2020 under PS20/15 - these permanently ban the mass-marketing of speculative illiquid securities to retail investors;

• and its Investment Harms campaign. After the FCA’s 2020/21 Business Plan identified reducing harm in the Consumer Investment market as a business priority, the FCA has been looking to better understand investors who engage in high-risk investments like cryptocurrencies and foreign exchange. This work included the September 2020 Call For Input “The Consumer Investments Market”, which looked across the whole market and considered whether there are systemic issues that need to be addressed. The feedback to the Call For Input will be used to shape the FCA’s work in this are over the next three years.

In a broader context, the issue of the financial promotion regime has been under close scrutiny not only by the FCA but also HM Treasury, which, in July 2020, published proposed reforms to the regulatory framework for the approval of financial promotions by unauthorised firms under FSMA 2000. See our Insights article here. That consultation closed on 25 October 2020.