Read the Financial Conduct Authority’s (FCA) guidance on approving the financial promotions of unauthorised persons. Firms which approve financial promotions are already required to ensure that those promotions comply with the rules, both in presentation and in substance. The guidance explains some practical implications of FCA existing requirements, rather than setting out new standards.
The FCA have particular concerns about the promotion of unlisted debt securities or ‘mini-bonds’, although the broad principles outlined here are also likely to be relevant to approving financial promotions in other sectors. In the Dear CEO letter of 11 April 2019 the regulatory set out some examples of firms failing to meet our requirements when approving the financial promotions of retail investments (for example ‘mini-bonds’).
On this page, where it refer to a ‘firm’, it means an authorised person approving a financial promotion of, and for communication by, an unauthorised person. Where it refers to a ‘product provider’, it means an unauthorised provider of retail investment products (eg, bond issuer) that has its financial promotions approved by a firm.
Firms should read the FCA’s temporary rules on the marketing of speculative illiquid securities that will apply from 1 January 2020 to 31 December 2020.
If you intend to begin approving the financial promotions of unauthorised persons, you should consider whether this is something you need to tell the regulator about in accordance with Principle 11 (relations with regulators).
- Ensuring that a promotion is fair, clear and not misleading
Before a firm approves a financial promotion for communication by an unauthorised person, it must confirm that the financial promotion complies with the financial promotion rules (COBS 4.10.2 R (1)). This is also true of firms which approve their own financial promotions for communication by unauthorised persons (see PERG 8.9.3 G).
All financial promotions must be fair, clear and not misleading (COBS 4.2.1 R). This means that you must not approve the content of a financial promotion for communication by an unauthorised person, unless you are satisfied that the promotion is fair, clear and not misleading.
To be in a position to confirm this, you should consider both:
- the presentation of the promotion (eg, whether the risk warnings are given sufficient prominence)
- the substance (eg, the fairness and veracity of claims made and whether these can be substantiated)
You should therefore analyse, and carry out due diligence regarding, the substance of a promotion before approving its content for communication by an unauthorised person. The extent and substance of the analysis and diligence needed to be able confirm that a promotion is fair, clear and not misleading will vary from case-to-case and will depend on the form and content of the promotion.
When assessing whether a promotion is fair, clear and not misleading, a firm may need to consider (among other things):
- The authenticity of the proposition described in the relevant promotion. This may mean undertaking background checks on directors, controllers or other key individuals associated with the product provider.
- The commercial viability of the proposition described in the promotion. Has the promotion adequately disclosed any significant factors that could threaten the product’s viability? Could potential investors make an informed decision about investment?
- Whether advertised or headline rates of return are reasonably capable of being achieved. This may mean reviewing materials such as the product provider’s financial statements and/or management accounts, business plan, financial projections and capital position.
- Whether there are any fees, commissions or other charges within the investment’s structure or elsewhere that could materially affect the ability of the product provider to deliver advertised or headline rates of return.
- If the product is advertised as being eligible for a particular tax treatment (eg, for inclusion within an Innovative Finance ISA), does the product actually meet the requirements for this treatment? (For tax treatment, see also COBS 4.5.7 R; COBS 4.5A.8 EU )
In assessing whether a financial promotion is fair, clear and not misleading, a firm should consider the guidance in COBS 4. In particular, firms are reminded that COBS 4.2.5 G states that ‘a financial promotion should not describe a feature of a product or service as ‘guaranteed’, ‘protected’ or ‘secure’, or use a similar term unless:
- that term is capable of being a fair, clear and not misleading description of it, and
- the firm communicates all of the information necessary, and presents that information with sufficient clarity and prominence, to make the use of that term fair, clear and not misleading.
This means that where an investment is described in a promotion as ‘secured’ or ‘asset-backed’ (or equivalent), you should consider whether the promotion contains the information necessary to enable investors to:
- understand how such protection operates, and
- assess any potential weaknesses or deficiencies in it
This may involve taking steps to ascertain the likelihood of any security being sufficient to cover investors’ investments (eg, capital repayments, interest payments).
You are also reminded of the importance of being clear with investors about the extent to which a product or service is regulated. A financial promotion that you approve for a product provider should not suggest or imply that the product provider’s activities (eg, issuing bonds) are regulated if they are not (COBS 4.2.4 G (4)). The FCA wrote separately to firms in January 2019 on the importance of being clear with consumers about the extent of regulation applicable to products or services.
- Ensuring that a promotion complies with the financial promotion rules
COBS 4 also contains other requirements applying to different types of financial promotion.
A firm approving a financial promotion must confirm that the promotion complies with all applicable financial promotion rules (COBS 4.10.2 R (1)). In particular, a financial promotion that is likely to be received by a retail client must give a fair and prominent indication of relevant risks when referencing potential benefits (COBS 4.5.2 R (2); COBS 4.5A.3 EU).
On the need to ensure that risk warnings are afforded sufficient prominence within financial promotions, firms are reminded of FCA guidance.
When approving a financial promotion, you should form your own view of the risks associated with an investment in order to confirm that this requirement is satisfied (ie, that the promotion gives sufficient prominence to all relevant risks). You should not assume that the product provider has done so.
Where a financial promotion contains certain types of comparison, the firm approving the promotion must ensure that such comparisons are meaningful and presented in a fair and balanced way (COBS 4.5.6 R; COBS 4.5A.7 EU). This would include, for example, where a retail investment product is compared to a bank savings account. The promotion should contain enough information to enable prospective investors to make an informed decision.
- Reliance on others
When approving a financial promotion of, and for communication by, an unauthorised person, it is unlikely to be appropriate to accept at face value information provided by the unauthorised person. You should form your own view as to whether the promotion complies with financial promotion rules.
That said, in carrying out the types of assessment and analysis described here, you may be able to rely on information and analysis prepared by independent professional advisers on behalf of the unauthorised person. You should consider the appropriateness of relying on this type of information on a case-by-case basis.
- Social media and digital communications
Retail investment product providers are increasingly relying on social media and other forms of digital communication to promote their products. Firms approving financial promotions for communication through this type of channel are reminded of Social Media guidance (FG15/4).
- Systems and controls
COBS 4.10.1 G reminds firms that approve financial promotions that they should have in place systems and controls or policies and procedures, or an effective internal control system, in order to comply with our financial promotion rules in COBS 4.
A firm’s systems and controls should ensure that it does not approve financial promotions which it lacks the competence to properly review and consider.
You are also reminded of the importance of maintaining adequate records of the financial promotions which you approve (COBS 4.11.1 R (1)). When you approve a financial promotion, you should consider recording how the promotion complies with our rules (COBS 4.11.2 G).
- Complying with FCA requirements
FCA guidance on approving financial promotions is not exhaustive and is not a complete description of the steps which you should take when approving a financial promotion relating to a retail investment. It is up to you to determine the extent of the analysis or review needed to confirm that a financial promotion complies with FCA rules on a case-by-case basis.
Where the regulatory identify a financial promotion that has been approved by a firm but that does not meet requirements, there are a range of steps which they can take. These include:
- Asking the firm that approved the promotion to ensure that it is changed or withdrawn.
- Directing the firm to withdraw its approval of the financial promotion using the power in section 137S of the Financial Services and Markets Act 2000.
- Opening an Enforcement investigation which, if we find serious misconduct, may lead to Enforcement action such as a financial penalty.
How can we help you?
LS Consultancy has wealth of experience in reviewing financial promotions and can do so on a one-off or on an on-going basis.
We are also skilled in reviewing and assessing your financial promotion procedures and can assist you to establish the necessary framework to help future compliance with regulatory requirements.
Remember: Not everything is black and white when it comes to Financial Promotions, and many of the rules are open to interpretation. If you are unsure how your activities fit within the rules, please contact us.