FCA Financial Promotion Rules

Nov 4th '22

The Financial Conduct Authority (FCA) has recently published a policy statement (PS22/10) “Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions”. These new rules for authorised firms are part of HMT/FCA’s proposals to overhaul the UK Financial Promotion regime.


Although the FCA has made it apparent that these regulations are targeted at high-risk investments, the Regulator has said that it would be seeking to reform the regime for all authorised firms moving ahead. The new rules are applicable to all firms participating in the issue of Financial Promotions.


Why are these Rules coming through now?

The FCA is worried that, given the present state of the economy, particularly the high levels of inflation, people may be more inclined to participate in high-risk products because of the potential profits they provide. Consumers may try to interact with assets outside of their risk tolerance at a time when they are experiencing a cost-of-living problem, it is feared.


The FCA hopes that the implementation of these new rules will help to ensure firms are:


  • Communicating clearly with consumers about the risks associated with high-risk investments.
  • Providing customers, with clear information needed to make informed decisions about available investment opportunities.
  • Approving financial promotions to a high standard.


What are High-Risk Investments?

High-risk investments are described by the FCA as investments which may offer the chance of higher returns but put consumers money at higher risk.


Some examples of high-risk investments include Cryptoassets, Mini bonds (high interest return bonds), structured products and Contracts for Difference (CFDs).


As part of the recent policy statement, the FCA have categorised high-risk investments into groups by putting products with similar characteristics together:


  • Category 1 – Readily Realisable Securities (RRS) – address listed or exchange traded securities – these products will have no restrictions on marketing
  • Category 2 – Restricted Mass Market Investments (RMMI) – shares/bonds not on a regulated market/trading venue and Peer to peer loan agreements
  • Category 3 – Non-Mass Market Investments (NMMI) – pooled investments in unauthorised fund, debentures, real estate purchases


It should be noted that although the Treasury is developing legislation to include cryptoassets in the rules for financial marketing, they now lie outside the purview of the regulations.


When are the new rules coming into force?

The rule changes will come into force on 1st February 2023, apart from the changes to Risk Warnings which take effect from 1st December 2022.


What are the new rule changes?

Other than the above noted new classifications of high-risk investments (Chapter 3), the FCA regulations emphasise modifying the “Consumer Journey” and approving and disseminating marketing collateral and financial promotions.


Changes to the consumer journey

According to the FCA, it is now too simple for customers to click through and acquire high-risk investments without having a sufficient grasp of the dangers involved. To address this, the FCA is putting in place the following seven measures:


  • Requirement for Firms to strengthen the content of their risk warnings
  • A ban on inducements to invest (for Direct Offer Financial Promotions)
  • The Introduction of positive frictions (slowing down the period between the issuance of a Financial Promotion and a subsequent account opening)
  • Improvements to the criteria for client categorisation
  • Stronger appropriateness tests
  • Requirement to complete preliminary suitability assessments (for NMMI’s only)
  • Enhanced Record-keeping requirements for firms


What do these measures mean?

1  Strengthened Risk Warnings
The FCA have made changes to their guidance surrounding Risk Warnings. They have stated that risk warnings must be:

      • Prominent
      • Legible and contained within its own border, with the correct bold/underlined text
      • Statically fixed at the top of the screen even when the client scrolls up/down the page
      • On every linked page that relates to the investment


The following wording has also been suggested as a standard for firms to follow:


“Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.1


1 The “Take 2 mins to learn more” should link through to a full risk summary which will be in a prescribed format (which will be contained within FCA COBS 4 Annex 1R).


The FCA believes that customers may not always understand the normal “Capital at risk” statement, hence its suggested standard language is meant to ensure that Firms move away from it.


Banning Inducements to invest
The new rules place restrictions on direct offer financial promotions (“DOFP”), specifically banning inducements to invest for DOFP’s.


DOFP’s are time pressured promotions, for example ones which include a “buy now” or “invest now” button or a form which asks for the customer’s bank details up front without any prior contact.
In addition, the FCA have decided to ban activity that incentivises investments such as “refer a friend” or new joiner bonuses.


3  Cooling off period
The FCA is mandating a minimum 24-hour cooling-off period for first-time investors with a company between the moment the customer seeks to be able to invest and the time they are actually permitted to put money into the investment. It should be emphasised that businesses are permitted to do onboarding checks, etc., during this period.


4  Personalised risk warning pop-up
For first time investors with a firm, a personalised risk warning should appear as a “pop-up or equivalent” for new clients of a company. The client must then indicate whether they want to continue or exit when this warning fills the majority of the screen. Below is the recommended phrasing. Firms may customise this, but any modifications require a supporting justification, which the Firm must provide.


[Client name], this is a high-risk investment. How would you feel if you lost the money you’re about to invest? Take 2 mins to learn more.


  1. Improving Client Categorisation
    The new regulations include a requirement for proof when classifying investors. For high-net-worth investors, for instance, it is necessary to disclose their amount of income. To protect privacy of investors this can be rounded to the nearest £10,000/£100,000, respectively. Firms will not be required to request further evidence than this outside of their standard Source of Funds/Wealth evidence. However, the FCA believes this will help improve the self-certification process.
  2. Appropriateness Test
    To ensure Firms are properly ascertaining whether the client has sufficient knowledge and experience:

    • The FCA will introduce guidance on the types of questions required to be covered in the appropriateness test. The main purpose of this is to move away from the binary yes/no answers which consumers can give.
    • Consumers must wait at least 24 hours before undertaking the appropriateness test if they fail it in the first instance. The FCA also want the questions posed to consumers to be different each time they are asked.
    • Firms should not encourage clients to retake the test after they have been assessed as inappropriate.
  3. Preliminary Suitability Assessment
    In the case of Non-Mass Market Investments (NMMI’s), self-certified sophisticated or high-net-worth investors are subject to a preliminary assessment of their suitability. The firm will use this information to determine if the investment will satisfy the demands and goals of the customer.
  4. Record Keeping requirements
    The FCA have mandated firms to record metrics relating to client categorisation and appropriateness. The regulator states firms should already have a record of this information and believe this should not be an additional regulatory burden.


Strengthening the role of Approver

Perhaps the biggest change from the new rules relates to those firms which are approving financial promotions. Such Firms will have to make sure the individual authorising financial promotions has the necessary knowledge and will be personally accountable for the general calibre of financial promotions provided to customers.


The FCA has prescribed the following rules to be implemented by those approving Financial Promotions:


  • All approved promotions must include the name of the authorising firm as well as the date of approval. The required format for this is ‘Approver FRN xxxxxx’. This text must be ‘clickable’ and must open a page where the approval firm’s full name, and the date of the approval is displayed.
  • Approval Firms must self-assess whether they have the necessary competence and expertise (C&E) to approve a Financial Promotion. C&E must be related to the investment product itself.
  • Firms must continuously monitor compliance of any approved promotions. For example, articles on a website must not be changed without approval and the approval firm must implement controls to ensure this policy is adhered to. For example, Firms must request attestations of ‘no material change’ every 3 months for the lifetime of the approved promotion.


What should firms be doing now?

Firms that promote high-risk investments need to familiarise themselves with the FCA’s final rules and carry out the following:


  • Identify/classify high-risk investments they promote (RMMI/NMMI)
  • Update and change risk warnings as per the guidelines by 1st December 2022
  • Train staff on the new rules
  • Implement systems and controls to record metrics for appropriateness/categorisation


Firms that approve financial promotions need to:


  • Ensure that their name and date of approval are included on all future promotions
  • Carry out self-assessments as to whether they have the necessary competence and experience to approve financial promotions
  • If an S21 approver, obtain necessary attestations that there are no material changes to previously approved promotions


Need some promotional advice? If you want to understand more about how to make sure your marketing materials meet FCA standards, please click here.


Contact us to learn how LS Consultancy can work with your firm.


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