Shearman & Sterling LLP | FinReg | UK Conduct Regulator Publishes Discussion Paper on Strengthening the Financial Promotion Rules for High-Risk Investments
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  • UK Conduct Regulator Publishes Discussion Paper on Strengthening the Financial Promotion Rules for High-Risk Investments

    The U.K. Financial Conduct Authority has published a discussion paper seeking feedback on how the U.K. financial promotion rules might be strengthened to reduce consumer harm arising from investing in inappropriate high-risk investments that do not meet a customer's needs. Feedback to the paper can be submitted until July 1, 2021. The feedback will help the FCA to develop the proposed rules on which it intends to consult later this year.

    According to the FCA, one of the main ways a consumer gains an understanding of the risks and regulatory protection associated with an investment is from the information included in a financial promotion. However, although the financial promotion might meet the FCA's requirement to be fair, clear and not misleading, the investment may still be inappropriate for that investor. High-risk investments are those to which marketing restrictions apply under the rules and include non readily realizable securities (NRRSs), peer to peer (P2P) agreements, non mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs). Since January 2020, the marketing of speculative illiquid securities to retail investors has been banned, first under a temporary product intervention measure, then made permanent from January 1, 2021. The measure restricts the mass-marketing of non-transferable bonds (sometimes colloquially termed "mini-bonds") and preference shares to retail investors and requires improved disclosure to be made to high net worth and sophisticated investors.

    The discussion paper covers three key areas that may improve customer protection in relation to high-risk investments, which are:
    • The classification of high-risk investments

    The restrictions on financial promotions depend on the classification of an investment. The FCA is seeking feedback on whether there are any investments that are not subject to restrictions that should be and on whether its classification of certain investments should be amended to prevent regulatory arbitrage.
    • ‚ÄčThe segmentation of the high-risk investment market

    The FCA is intending to enhance the rules to further segment high risk investments from the mainstream market. It is asking for feedback on certain aspects, such as how to strengthen the investor categorization process where access to a financial promotion is restricted to certain types of investor and how to effectively improve risk warnings.
    • The responsibilities of firms that approve financial promotions

    The FCA considers that authorized firms approving the financial promotions of unauthorized firms should have clear responsibilities to ensure compliance of such financial promotions on an ongoing basis. The FCA is seeking views on what these responsibilities should be. In July 2020, HM Treasury proposed to limit the ability to approve financial promotions of unauthorized firms to authorized firms that obtain the specific consent of the FCA to do so. Consent would not be required for the approval of promotions of unauthorized entities within the same group of an authorized firm or to the approval by an authorized firm of its own financial promotions. It is also envisaged that the FCA's consent could be tailored to limit the types of products for which a firm could provide approval. HM Treasury also consulted on whether to bring certain unregulated cryptoassets within the scope of the financial promotion rules. HM Treasury is yet to confirm the outcome of these two consultations.

    View the FCA's discussion paper.

    View details of HM Treasury's consultation on approval of financial promotions.

    View details of HM Treasury's consultation on bringing unregulated cryptoassets within the financial promotion regime.

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