New FCA Discussion Paper on financial promotions for high-risk investments

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The FCA has published a Discussion Paper seeking views on changes needed to protect consumers from harm, where a financial promotion is made for a high-risk investment that focuses on classifying high-risk investments, markets, and the responsibilities of firms approving financial promotions.

The FCA aims to ensure that consumers are investing in products that are appropriate and meet their needs. That’s why the paper highlights the potential for harm, if consumers are invited to invest in products that do not meet their needs and are high risk.

It seems that the COVID-19 pandemic has accelerated this potential for harm, and technology is making investing more accessible. The FCA is concerned about whether consumers can cope with large investment losses.

The paper is part of the FCA’s review of the Consumer Investment Market, which has identified a need to segregate high-risk investments from the mainstream market. The FCA is reviewing ways to disrupt consumers from investing in unsuitable products in a bid to prevent harm, and to seek views from across the sector – a balance should be struck between this protection and consumers taking responsibility for their investment decisions.

An example is the FCA’s concern with the financial promotion regime, and whether it is robust enough to disrupt all instances where an inappropriate high-risk investment is marketed to a consumer i.e., where the promotion is fair, clear, and not misleading but is still a bad match for the consumer.

The paper looks at current restrictions in place for certain investment products (for example illiquid and non-readily realisable securities and P2P agreements), and how high-risk products are managed under the current regime. The FCA is concerned that these restrictions do not go far enough, given how far the consumer investment landscape has changed in a short period of time, and views are sought on whether other investments should be subject to similar restrictions and whether classifications should be enhanced.

The paper also considers if changes could be made to the financial promotions regime to assist in separating high-risk investments from the mainstream market. The FCA sees three areas of importance here:

  • the categorisation of retail investments
  • improvements in risk warnings – consideration of whether current risk warnings are effective and what changes could be made to improve these
  • the addition of ‘positive friction’ to the customer journey when making high-risk investments – whether the introduction of cooling-off periods, educational videos, and online testing could improve the consumer outcome

The aim is to ensure that the outcome of non-advised investments meets the consumer’s appetite for risk. The FCA is concerned about the ability of consumers to ‘click through’ to high-risk investments when decisions like these should be taken with caution and the right level of knowledge.

The last section of the paper sets out the FCA’s position on approvers of financial promotions. It considers the balance to protect consumers from harmful financial promotions against the burden placed on an approver. If that burden becomes too great, approvers could be put off approving financial promotions for unauthorised firms.

The FCA is seeking views on whether ongoing monitoring requirements should be introduced for approvers, (for example re-approval of amended promotions) and if additional frictions are introduced, the role of the approver in ensuring compliance, as well as the approver’s role in client classification, appropriateness, and suitability assessments.

The proposed rule changes will be consulted later in the year and will form part of the FCA’s overall review of the Consumer Investment Market, to support its bid to strengthen consumer protections for people who make high-risk investments.

The paper, which was published on 29 April 2021, seeks responses by 1 July 2021, to be submitted via the FCA website. If you have further questions on any of the above or would like to know more about how the financial promotions regime affects your business, please get in touch.