Pulling the plug

Both the FCA and the Treasury have been looking closely at how firms issue and approve marketing communications, with the FCA increasingly intervening where it sees poor behaviour. But what steps should firms be taking to protect themselves? The most sensible New Year’s resolution would be to revisit your financial promotion approval policies and checklists to ensure that they will remain fit for purpose.

Financial promotions have attracted considerable attention from the FCA in recent years. We believe that 2023 will be the year that firms should look carefully at the promotions they are making and approving.

There are a number of reasons why:

1. Significant changes are being made to the existing financial promotions rule framework from both the FCA and the Treasury;
2. The much-promised financial promotions gateway looks likely to become law during 2023; and
3. Various other regulatory initiatives will also directly impact your promotions (such as the new Consumer Duty rules and draft rules against greenwashing).

New year, new rules

Whilst there has been a lot of attention given to individual measures as they come along, firms should now step back and make a more holistic assessment of how these measures will apply to them. Firms may also want to revisit their risk appetite for issuing or approving promotions at all.

We do not have the space to list out in detail all the changes to financial promotions rules consulted on in the past few years, but the FCA included a helpful summary of them in its consultation on the financial promotion gateway (discussed below), CP22/27.  In summary, recent consultations have covered: sector specific changes (such as CFDs and cryptoassets); updating the FPO exemptions for high net-worth individuals and sophisticated investors (which the FCA stated in CP 22/27 needs “significant change”); and new rules for high-risk investments. The bulk of the rules on this last item are coming into force in February 2023 and in-scope firms should already be well advanced in their planning. However, all firms need to look carefully at PS 22/10 as there are broader changes that apply to all firms, even where they are not offering high-risk investments. There is non-handbook guidance (a current favourite item at the FCA!) that applies to any firms approving financial promotions regardless of type. Changes to COBS 4.10 mean that firms approving promotions for distribution by unauthorised firms must continue to ensure that promotions remain compliant throughout their lifetime, and that the firm has sufficient competence and experience to give the approvals.

Once live, firms will no longer be able to approve third party’s financial promotions unless they have express consent from the FCA to do so

We envisage this having the potential to lead to significant supervisory and enforcement action in the coming years. This is emphasized by the FCA which stated that it will assess the success of its recent measures on financial promotions by the supervisory investigations and enforcement actions that will follow.

Will you pass through the gateway?

The second area to watch out for is the financial promotions gateway. This has been in the pipeline since July 2020, partly in response to the mini-bond mis-selling issues. The mechanism to create the gateway is included in the Financial Services and Markets Bill (“FSMB”) and the FCA has already consulted on rulebook changes to give effect to the gateway. Firms should therefore expect a swift implementation in 2023/24.

The reporting and monitoring burden will also be increased on firms approving or issuing promotions

Once live, firms will no longer be able to approve third party’s financial promotions unless they have express consent from the FCA to do so. Firms who wish to approve communications will therefore need to ensure they have applied for a variation of permissions (“VOP”) in time. Care should be taken over VOP applications, as the FCA has made it clear that it will refuse weak submissions. Until the full detail of these rules and exemptions has been produced, it is difficult to assess the exact impact but early indications from FSMB and CP22/27 suggest that fund managers will be particularly affected as well as investment banks and corporate finance firms wanting to ensure their clients’ issuances can be extended to retail investors. The reporting and monitoring burden will also be increased on firms approving or issuing promotions.

Wider regulatory changes

Finally, there are wider initiatives such as the FCA’s new Consumer Duty and measures to reduce greenwashing. Many of these are discussed in other articles in this campaign. A key component of implementing these rules will be a reconsideration of your policies and procedures governing promotions and your approach to issuing new communications.

One of the major risks for firms is that this oncoming glut of rules is taking place on different timescales, and with overlapping changes

One of the major risks for firms is that this oncoming glut of rules is taking place on different timescales, and with overlapping changes. This makes it very difficult for firms to properly assess and anticipate the impact of these changes and to update their procedures accordingly. It is perhaps ironic that rules which are meant to enshrine Principle 7 (requiring firms’ communications to be clear, fair and not misleading) are now so Byzantine that it is frequently unclear exactly which provisions apply when, and firms are often obliged to work through multiple cross-references of definitions to find out what a provision applies to.

Conclusion

The FCA is clearly looking closely at firms’ promotions. If firms do not take care over the promotions they issue and approve and watch to ensure they have embedded all new requirements, they could soon find themselves on the wrong end of supervisory or enforcement action.