Financial Promotions for high-risk investments

The Financial Conduct Authority (FCA) has issued a statement to present the findings from a review of firms offering restricted mass market investments (RMMIs) to retail investors. The review followed a first review in December 2022 among firms offering Peer-to-Peer lending and investment and Investment Based Crowdfunding (IBCF) opportunities and which found multiple deficiencies within reviewed practitioners.
As with the first review, the aim of the second was to assess firms‘ compliance with the new financial promotion rules for high risk investments, including cryptoassets, which were implemented in 2022 and which require risk warnings on financial promotions to prevent harm to consumers, among others. This time, the review focused in detail on the provision of incentives to invest, the provision of cooling-off periods, the display of risk warnings, client categorization, and the performance of appropriateness assessments following the effective date of corresponding rules in February this year.
###### The key findings from this second review are presented below, including good and poor practices of reviewed firms:
(1) Investment incentives:
Regarding incentives to invest, most firms withdrew incentives before February 1, 2023, the effective date of a corresponding ban of such incentives. The FCA, however, also found that but some firms made incentives available to new consumers after a minimum investment time period, which is non-compliant with the new financial promotion rules.
(2) Provision of a cooling -off period:
Concerning the cooling-off period, all firms implemented a 24-hour cooling-off period. However, some failed to provide consumers with the option to proceed or leave the investment journey, failed to present such option in a prominent manner, or failed to offer clear information about the cooling-off period’s purpose.
(3) The display of risk warnings:
In terms of risk warnings, firms often provided personalized risk warnings late in the journey or failed to meet prominence requirements, potentially undermining the effectiveness of the risk warnings. In view of the significance of risk warnings, the FCA re-emphasizes the importance of capturing consumers‘ attention to enable them to make well-informed investment decisions.
(4) Client categorizations:
Regarding client categorization, most firms had robust processes in place to help clients categorize themselves to ensure that the service or products firms offer meet the characteristics of consumers. Some firms, however, inappropriately guided consumers to select specific categories by altering the description of the categories or their titles, thereby downplaying the risks of the offered RMMIs. In this context, the FCA also reminds firms that they should take serious any complaints from customers about a wrong categorization.
(5) Performance of appropriateness assessments:
The practices regarding appropriateness assessments strongly varied among firms, with some assessments appearing to be designed in a way to ensure consumers pass the assessments which naturally goes against the key purpose of the assessment. In this context, the FCA observed the use of „binary“ questions or obviously incorrect answer options in multiple-choice questions, making the assessments unreliable in determining product suitability. While most firms required consumers to answer all questions correctly to pass the assessment, a few allowed for some incorrect answers. The FCA also found that many assessments did not cover all relevant topics outlined in the COBS 10 Annex which is inappropriate and in violation with corresponding rules. Regarding assessment failures, some firms used the same questions on follow-up assessments, which naturally is non-acceptable as the (potential) client may already know the correct answer from the first assessment.
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To conclude the FCA notes that is has provided individual feedback to the reviewed firms, expecting them to make necessary improvements to meet expectations and enhance consumer outcomes. All firms offering RMMIs to retail clients should consider the review and make changes wherever needed to ensure compliance with the new financial promotion rules.