Strengthening the Financial Promotion Rules

These requirements come into force on 1 February 2023.  They apply to all FCA authorised firms, previously passported EEA firms with temporary permissions and Gibraltar-based firms.

The scope of the new rules is not consistent for each requirement, for example, some apply only to firms approving financial promotions for third parties, whereas others also apply to all firms which communicate financial promotions (whether for themselves or on behalf of third parties).  We have summarised the scope of each requirement below.  Where a requirement applies to firms which approve or communicate financial promotions on behalf of third parties, there is no exemption for firms which do so for affiliates.

The new requirements include:

Competence and expertise

Scope: this requirement applies to all firms which communicate or approve financial promotions.

A firm must not communicate or approve a financial promotion unless the individual responsible for the compliance of the financial promotion with the relevant rules has appropriate competence and expertise in the type of investment or service to which the promotion relates.  If a firm lacks appropriate competence and expertise it can have another FCA authorised firm with the relevant expertise confirm compliance with those aspects on its behalf.

This requirement reflects a particular concern of the FCA that firms may be communicating or approving financial promotions in respect of asset classes or for client profiles for which they do not have appropriate expertise.  Firms will need to consider whether they have all appropriate expertise and address any gaps.  It may be an issue, for example, for a UK firm which approves or communicates promotions on behalf of an overseas affiliate where the expertise in relation to the relevant asset class sits in the affiliate.

Ongoing monitoring

Scope: this requirement applies to all firms which approve financial promotions for communication by unauthorised persons.

Firms approving financial promotions will be required to play a more active role in ensuring promotions remain compliant during the lifetime of the promotion: their responsibility does not end after the initial approval.  The new obligations include:

• an ongoing monitoring requirement;
• as part of this requirement, where the promotion is issued by an unauthorised person the firm is required to obtain a written attestation from the unauthorised entity at least every three months. The attestation is required to confirm that there has been no material change both to the promotion and to circumstances which might affect its ongoing compliance with the financial promotion rules.

Firms will need to implement a process for tracking promotions after their approval and applying the ongoing monitoring and attestation requirements during the life of the promotion.

Conflict of interest obligations

Scope: this requirement applies to all firms which approve financial promotions for communication by unauthorised persons and to firms which confirm the compliance of financial promotions (see "Competence and expertise" above).

Firms are required to take all appropriate steps to identify, prevent and manage conflicts of interest between the firm (and related persons) and any person for whom the firm approves, or confirms the compliance of, a financial promotion.

Including name of approver and date of approval

Scope: this requirement applies to all firms which communicate or approve non-exempt financial promotions for retail clients.

Each financial promotion approved or communicated by a firm must include not only the name of the firm (as now), but also the date on which it was approved and, if relevant, the name of the firm which has confirmed the compliance of the financial promotion (see "Competence and expertise" above).

There are provisions which address how this information should be provided if the format of the promotion is such that this information cannot reasonably be provided (for example, if the promotion is in digital form, such as a mobile application).

The FCA has also issued Guidance addressing these requirements.

New investment categories

The FCA has grouped investments into three categories.  The change has been framed as a rationalisation rather than an overhaul.  In essence, it has grouped together some of the existing categories for which the risk profile, and therefore the rules, were similar.  The intention is to aid understanding of the requirements.  From lower to higher risk, the categories and a very high-level overview of their restrictions are as illustrated below:

Notes:

1. Where the FCA terminology has not changed we have not explained it further.
2. Specific provision is made in some of the rules for different treatment of specific investment types, such as local authority securities, long-term asset funds and closed-end investment trusts with premium listings. The rules are complex and must be consulted with care.
3. The overview of restrictions for each investment type reflects the changes of both December 2022 and February 2023.

Risk warnings for all RMMI and NMMI promotions

The FCA is introducing a requirement for all promotions of RMMIs and NMMIs to retail clients to contain risk warnings and "2 minute read" risk summaries which are prescribed in relation to both content and form.  Unlike some of the other new requirements for RMMIs, this requirement is not confined to direct offer financial promotions.  This requirement comes into force on 1 December 2022, but from 1 February 2023 it will be absorbed into the wider "consumer journey" described below.

The "consumer journey"

From 1 February 2023, firms wishing to make direct offer financial promotions of RMMIs to retail clients or any promotion of NMMIs to retail clients which are high net worth or sophisticated investors will need to follow the new consumer journey rules.  The order, timing and content of many of the steps are prescribed and must be followed with care.  While there are some differences between RMMI promotions and NMMI promotions, essentially the consumer journey involves:

• The provision of risk warnings and "2 minute read" risk summaries, some personalised, at specific points in the journey.
• The recipient being given opportunities to leave the process.
• Cooling off periods.
• Categorisation of the recipient as a high net worth, sophisticated or other restricted investor (as appropriate).
• Suitability assessments (where relevant for the categorisation of the recipient of a NMMI) and/or appropriateness assessments (before accepting an investment following a direct offer financial promotion of a RMMI).

Certain exemptions also apply for corporate finance and venture capital contacts.

Additional requirements for Speculative Illiquid Securities

From 1 February 2023 firms approving and communicating financial promotions relating to Speculative Illiquid Securities for communication to retail clients will be required to include a statement of the proportion of capital raised by the issue which will be paid out as expenses (including fees and commissions) to any third party and provide details of that party.  There are prescriptive rules governing the prominence of the statement and how the expenses must be expressed

Approving communications for RMMIs and NMMIs

From 1 February 2023, firms which approve direct offer financial promotions of RMMIs or any financial promotions relating to NMMIs, in each case for communication to retail clients, must take reasonable steps to ensure on a continuing basis that certain of the additional requirements relating to these promotions summarised in this briefing are met in relation to each communication of the promotion.

The FCA is placing on the approving firm responsibility for ensuring that certain requirements are met. 

Ban on incentives to invest

From 1 February 2023 there will be an express ban on monetary and non-monetary benefits which incentivise investment in RMMIs and NMMIs.  The ban is broadly drafted but would include, for example, "refer a friend" and new joiner bonuses.  There are some limited exemptions including for goods and services provided by the investee company (or its group).

Record Keeping

The record keeping obligations have been updated to reflect the new requirements.

If you would like further information or assistance in understanding the new rules and their implications, please speak to your usual Travers Smith contact or any of the individuals below.