As first floated in April last year as part of its consumer investments strategy, the FCA wants to force people to take an online test before they can invest in high risk assets.
The regulator also said it will ensure firms that approve and communicate financial marketing have relevant expertise and understanding of the investments being offered, improve risk warnings on ads and ban incentives to invest, for example new joiner or refer-a-friend bonuses.
The proposals primarily related to financial promotions for high‑risk investments, which are those investments which are subject to marketing restrictions under the FCA’s rules.
This includes investment based‑crowdfunding, peer‑to‑peer agreements, other non‑readily realisable securities, non‑mainstream pooled investments and speculative illiquid securities. It will also include cryptoassets once they have been brought within the financial promotions regime.
Here are the devilish details in today's consultation paper:
1) Marketing restrictions
The FCA is proposing changes to three key areas of the financial promotion lifecycle: approving and communicating promotions (including a new date stamp for approved promotions and a new competence and expertise requirement for firms); lifetime of the promotion (including an ongoing monitoring requirement for firms approving promotions and consumer journey); and preliminary assessment of suitability for ‘Non‑Mass Market Investments’.
The FCA’s draft rules also proposed restrictions on the marketing of cryptoassets, in preparation for the government bringing the promotion of these high-risk investments under the regulator's remit.
Once this happens, the FCA said it plans to categorise qualifying cryptoassets as ‘Restricted Mass Market Investments’, meaning consumers would only be able to respond to cryptoasset financial promotions if they are classed as restricted, high net worth or sophisticated investors.
Firms issuing such promotions would have to adhere to FCA rules, such as the requirement to be clear, fair and not misleading.
The FCA is proposing to require that all financial promotions for ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments’ contain a risk warning which says: "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 2min to learn more."
2) Appropriateness tests
The FCA said consumer research has found that too many consumers are investing in high‑risk products that do not match their risk tolerance and are unlikely to meet their investment needs.
Under the FCA's appropriateness regime firms are required to gather information on an investor’s knowledge and experience in the relevant investment field and then assess the appropriateness of the investment for a consumer before they can respond.
The FCA said its appropriateness requirements are now often met through an interactive set of questions put to the consumer online, without any human involvement from the firm.
In order to strengthen the tests, the regulator proposes to introduce guidance on the types of questions to be covered.
Firms will need to create robust and effective assessments that consider the features and risks of the investments they offer, which may include matters that are not covered in the guidance.
The FCA also proposed to introduce a rule that where an investment is assessed as being inappropriate for a consumer, the firm cannot re‑assess the appropriateness of that investment for the same client for at least 24 hours.
The FCA said this proposal will help investors who are motivated by social or emotional factors when investing, by making sure they take time to consider their choice and understand the risks of the investment before proceeding.
As part of this requirement, the FCA is also proposing to introduce a rule that the questions firms ask must be different each time a consumer is subject to the assessment.
Furthermore, in order to avoid coaching, consumers should only be told the broad areas that caused the investment to be assessed as inappropriate rather than the specific questions.
3) Record keeping
To help the FCA monitor the impact of these changes, it is proposing that firms should record data to demonstrate the effect of the proposals.
This includes data on whether consumers proceed to access the investment after each intervention, whether consumers click the link in the risk warnings and the outcomes of appropriateness assessments and client categorisation.
As with other information and records firms hold, the City watchdog said it expects firms to have the ability to provide this information to the FCA if requested.
These record keeping requirements will be used alongside total transactions with retail consumers which firms will record already.
However, the FCA said it welcomes views as to what specific metrics should be required in the final rules, to ensure that what it requires is useful for assessing policies’ effects over time without being unduly burdensome on firms.
The FCA is inviting feedback on its proposals by March 23, 2022 and said it will consider all feedback before determining its final rules and, subject to the responses received, intends to confirm its final rules in summer 2022.
sonia.rach@ft.com
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