Financial Promotions for high-risk investments
In August 2022, the FCA published PS22/10, which outlined new requirements for firms promoting high-risk investments (HRIs) to retail clients. The initial rules requiring risk warnings on financial promotions went live on 1st December 2022, whilst the remaining rules went live on the 1st of February 2023.
The FCA selected a sample of 13 firms of different sizes from within the Peer-to-Peer and IBCF portfolios and reviewed the approach of these firms to each of the conditions set out in COBS 4.12A:
- Incentives to invest
- Cooling off period
- Risk warnings
- Client categorisation
Incentives to Invest: The FCA rules prohibit firms from communicating or approving a financial promotion which offers any monetary or non-monetary incentive to invest in HRIs. Poor practice here would be a firm not properly considering the full range of incentives offered by the firm against the ban.
Cooling-off Period: Firms must include a cooling-off period for new consumers who request to see a direct offer financial promotion which must be a minimum of 24-hours from the point that the consumer requests to see the promotion. Poor practice seen by the FCA in their review includes firms not giving the consumers the express option to proceed with or leave the investment journey at the end of the cooling-off period, or giving more prominence to the option to proceed rather than to leave.
Risk Warnings: Firms are expected to give a personalised risk warning to a consumer at the required point in the onboarding journey. The FCA also actively encourages firms to include additional warnings at points in the journey where the firm feel it may aid a consumer’s understanding of the risks. Poor practice includes incorrect wording within the risk warning, or changing the display of the warning so it does not meet with the prominence requirements of the FCA.
Client Categorisation: The FCA requested firms to implement a robust process for ensuring consumers were able to self-categorise themselves appropriately and be provided with correctly worded categorisation statements. The FCA would not like to see firms guiding a consumer inappropriately towards a category that does not reflect their circumstances, firms can further enforce this by acknowledging a client who believes to be mis-categorised, and ensuring that they do not receive any kind of promotions for investments that may not be suitable for them.
Appropriateness: The aim of the appropriateness assessment should be to prevent consumers investing in RMMIs where it would not be appropriate to do so. The assessments themselves should never be designed in a way that ensures a consumer to pass, rather than being designed for them to pass on merit. Assessments are expected to cover all relevant topics outlined in the relevant COBS 10 annex, or are to be formed of randomly selected questions from a question bank where the selected questions may cover all topics.
The FCA expects all firms offering RMMRs to retail clients to consider the examples provided and any changes they feel necessary to their current practises in order to meet FCA expectations and improve consumer outcomes.