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  • UK Conduct Authority Consults on Wide-Ranging Change to Financial Promotion Rules

    The U.K. Financial Conduct Authority has launched a consultation on proposed changes to the financial promotion rules. The proposals range from rules relating to the approval by authorized firms of financial promotions of unauthorized firms and the new regime for qualifying crypto-assets and other high-risk investments. Many of this suite of changes address or build upon recommendations of the Gloster Report or are otherwise related to the fall-out from the London Capital & Finance plc scandal. Responses to the consultation may be submitted until March 23, 2022. The FCA intends to publish its final rules in Summer 2022.

    Changes to Rules for High-Risk Investments

    The FCA is proposing to organize the rules into three different categories:
    1. Readily Realizable Securities, which are listed and/or exchange traded securities, for which no additional marketing restrictions apply.
    2. Restricted Mass Market Investments, which are Non-Readily Realizable Securities (NRRS), Peer-to-Peer (P2P) agreements and qualifying crypto-assets (which HM Treasury has confirmed will be brought within the Financial Promotion regime), and for which marketing to retail investors will be allowed subject to restrictions.
    3. Non-Mass Market Investments, which are Non-Mainstream Pooled Investments (NMPI) and Speculative Illiquid Securities (i.e., including speculative mini-bonds) for which marketing to retail investors will be prohibited. The FCA states that it is not, at this stage, taking forward its proposals to extend the speculative illiquid category to include equity shares or P2P agreements with similar characteristics to a speculative mini-bond. The FCA will revisit the issue later in the year.

    Strengthening Rules to Enhance Consumer Protection

    The FCA is proposing to amend the financial promotion rules for Restricted Mass Market Investments and Non-Mass Market Investments. It is proposed that firms would have three months from publication of the final rules to comply with the new rules. The proposed changes include:
    • Improving risk warnings by introducing rules for how risk warnings should be displayed, introducing a new text for all financial promotions ("Don't invest unless you're prepared to lose all your money invested. This is a high risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2 min to learn more") and prescribing risk information for different types of high risk investment.
    • Prohibiting inducements to invest from all financial promotions for high risk investments, which will include banning the promotions from having any monetary and non monetary benefits that incentivize investment activity.
    • Adding two "positive frictions," the first being a personalized risk warning pop up for first time investors with a firm and the second, a 24 hour cooling off period for first time investors with a firm.
    • To align the rules with HM Treasury's proposal to change the requirement for a firm to "believe on reasonable grounds" that the individual has signed the relevant investor statement to one where a firm is required to reasonably believe that an individual is a high net worth individual or self-certified sophisticated investor.
    • Enhancing the appropriateness tests for Restricted Mass Market Investments by introducing guidance on the types of question to be covered by appropriateness assessments and to discourage binary answers.

    Enhancing the Rules Applicable to Authorized Firms Approving the Financial Promotions of Unauthorized Firms

    HM Treasury has announced that it will be implementing the regulatory gateway for the approval of financial promotions of unauthorized firms. This will mean that authorized firms will be banned from approving financial promotions of unregulated firms and will need to apply to have the prohibition removed in whole or part before they are able to approve financial promotions of unauthorized firms. The change will be made through legislation amending the Financial Services and Markets Act 2000.

    The FCA is proposing to amend its rules on the approval of financial promotions of unauthorized firms by authorized firms, including, among other things, to:
    • Require all relevant financial promotions to include a date stamp. The FCA also intends to bring in stronger guidance on adding the name of the approving firm to financial promotions.
    • Introduce a new rule requiring firms to self assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a financial promotion. A firm would need to consider whether it has the relevant experience and/or qualifications in the sector as well as the previous employment history and qualifications of the individuals responsible for approving promotions.

    Firms would be required to keep records of how they meet the requirement for each approved financial promotion. The FCA is considering how these changes may be linked into the Senior Managers and Certification Regime.

    The FCA is also considering stronger rules for ensuring financial promotions remain compliant, including requiring firms to take reasonable steps to monitor the continuing compliance of approved promotions and requiring firms to collect, every three months, attestations of "no material change" from clients with approved promotions.

    The FCA is proposing to allow firms three months from the publication of the final rules to comply.

    Classifying Crypto-Assets as Restricted Mass Market Investments

    The FCA is proposing to apply to qualifying crypto-assets the same rules proposed for other high risk investments classed as Restricted Mass Market Investments. The FCA proposes that the new rules would apply from the date qualifying crypto-assets are brought within the financial promotion regime.

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