This week, the Financial Conduct Authority (FCA) announced a ban on the mass marketing of speculative mini-bonds to retail customers.
Why has the regulator taken this step, and what implications does it have for Compliance teams?
What does the ban entail and why has it been brought in now?
The FCA announced that the ban is being introduced ‘ahead of the upcoming Individual Savings Account (ISA) season’, when retail customers traditionally invest more heavily – and because mini-bonds quite frequently have ISA status, or claim to have ISA status even if they don’t.
Announcing the move, FCA chief executive Andrew Bailey said that: ‘The FCA ban will mean that unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.’
The restriction has been brought in without any consultation, using the FCA’s ‘product intervention’ powers. These powers enable the Authority to make rules before consultation, where it identifies a significant risk to consumers which requires prompt action.
The restriction will come into force on 1 January 2020 and last for 12 months while the FCA consults on making permanent rules.
What is a mini-bond?
The term mini-bond can refer to a range of investments.
The ban announced this week applies only to ‘more complex and opaque’ arrangements which see the funds raised used to lend to a third party, invest in other companies or purchase or develop properties.
There are various exemptions to the ban, including for listed mini-bonds and for companies which raise funds for their own activities (other than the ones above) or to fund a single UK property investment.
What can the FCA do to limit the promotion of speculative mini-bonds?
The sellers of speculative mini-bonds are often unauthorised, giving the FCA limited powers over them. It can, however, act when an authorised firm approves or communicates a financial promotion for, or directly advises on or sells, these products.
Introducing the ban, the regulator cited a number of actions it has already taken over the last 12 months to address what it calls ‘the real risk of consumer harm’ from speculative mini-bonds. These include:
- Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation. (FCA’s work to tackle unauthorised activity.)
- Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules. (Read more here on the regulator’s financial promotion rules.)
- Seeking to persuade the internet service providers, particularly Google, to take more action, for instance to take down websites promptly where they are likely to involve a breach of law or regulations.
- Contact with the Department of Culture, Media and Sport to urge inclusion of financial harm in the proposed legislation on online harms.
- Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions. (You can read more here about how the financial services industry can maximise the value and potential of data.)
What are the regulator’s next steps?
Firms which approve their own financial promotions are already required to ensure that those promotions comply with FCA rules.
In launching the new action on speculative mini-bonds, the FCA also published guidance on the requirements on firms when approving the financial promotions of unauthorised persons. It will be important for Compliance teams to understand these new requirements and ensure that their business meets them.
Announcing the new rules, the regulator said that it ‘believes that many promotions still fall short of existing requirements and firms which approve the financial promotions of unauthorised persons may not be taking adequate steps to ensure that they comply with our rules before approving them’.
How can firms ensure their promotions live up to FCA expectations?
To help your firm to comply with the FCA’s requirements, Compliance teams should work with the business to ensure that you:
1. Provide excellent customer service
Make sure you deliver what your financial promotions promise. Converting your client care promises into action means being able to substantiate the claims you make in your promotions.
2. Make sure you know the rules
Understanding what the regulator requires is essential to delivering it.
Everyone involved in producing promotions or other customer communications needs to understand what constitutes a financial promotion and what this means in terms of regulatory compliance. Importantly, this relates not just to content, but also to your review and approvals processes.
3. Ensure your processes are up to scratch
And when it comes to approvals processes, you need to create a compliant audit trail of reviews and approvals. You process, as well as the promotion itself, needs to meet regulatory standards. Some firms find that introducing a level of automation to their marketing processes can help here, making Compliance sign off compulsory before anything is published.
How can automation help?
Automating your financial promotions production, review and approvals processes can significantly reduce the risk of regulatory breaches and non-compliant promotions.
Automation can also create a digital audit trail that meets FCA standards, ensuring your process, as well as your end result, is compliant.
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.