FCA clarifies scope of ban on incentives for high-risk investments
The UK Financial Conduct Authority (FCA) has issued clarification regarding the scope of the ban on offering incentives to invest in high-risk investments.
The rule banning incentives for high-risk investments came into force on 1 February 2023. It reflects a similar ban that already applies to the marketing and distribution of Contracts for Difference (CFDs), which was introduced in 2019.
From subsequent discussions with firms following publication of PS22/10, the regulator has identified that the rules and accompanying Handbook guidance require clarification to prevent misunderstanding of the policy and better communicate what types of benefit the ban applies to.
The regulator explains that the ban applies to any incentives offered to retail clients as part of a financial promotion relating to high-risk investments, even when there is no requirement to invest to gain the benefit. The ban applies regardless of the rationale for offering the incentive, which consumer the incentive is aimed at, or whether it might be incentivising related actions to investing, such as registration or sign up.
The intention of the ban is not to prevent legitimate competitive business practices. To this effect the FCA exempted ‘shareholder benefits,’ for example, discounted products or services produced or provided by the firm receiving the proceeds of the investment, from the ban.
Under a similar principle the FCA is proposing to exempt from the ban incentives offered for the sole purpose of encouraging clients to switch platforms. This exemption is intended to apply where a financial promotion is aimed at inducing a platform transfer, but there is no attempt to encourage a client to change the total level of their holdings or the underlying products they hold.
The regulator recognises that switching offers are common practice across different markets and can be a legitimate practice used to build a customer base, promoting competition in the interests of consumers.
The FCA acknowledges that ‘incentive’ can be broadly defined and has received feedback that firms currently find it difficult to judge what might fall within the ban, based on the Handbook language.
The regulator is therefore also proposing to amend its Handbook guidance to clarify some of the factors that it considers characterise an incentive falling within scope of the ban.
Lower fees that are available to all retail clients and not linked to the volume of trades made do not constitute a monetary incentive. Firms are not prohibited from competing on price, and the price of an investment is an inherent part of the offer. The FCA considers this to cover tiered pricing models.
The watchdog recognises that tiered pricing is a common practice across many markets and allows consumers to benefit from lower costs if investing beyond a certain level. This enables consumers to benefit from lower marginal costs to firms from larger investments.