FCA proposes new measures to clamp down on misleading financial marketing
The UK Financial Conduct Authority (FCA) has proposed new measures to clamp down on illegal, unfair or misleading financial marketing.
The regulator outlined new checks for those firms which want to approve financial promotions. The new measures will require firms to demonstrate they have the right expertise for the promotions they wish to approve.
Under current legislation, any FCA authorised firm is allowed to approve financial promotions on behalf of other firms who are not authorised by the regulator. Changes being introduced by Parliament will require authorised firms to undergo new screening checks before they are allowed to approve financial promotions, giving the FCA greater oversight to stop harm before it occurs.
Firms will also be required to regularly report back to the FCA on financial promotions they have approved, helping the FCA crack down on rogue adverts.
The proposed reforms will ensure the FCA can act quickly to put a stop to harmful financial promotions communicated by unauthorised firms, including in areas such as high-risk investments and Buy Now Pay Later.
The financial promotions regime consists of 3 core elements that work together to govern how financial products and services are marketed:
- Section 21 (s21) of the Financial Services and Markets Act 2000 (FSMA) sets out ‘the financial promotion restriction’. This prohibits the communication of a financial promotion unless it is communicated or approved by an authorised firm. A breach of s21 is a criminal offence. Authorised firms can approve financial promotions for communication by unauthorised firms. The authorised firm must only approve the financial promotion if it complies with FCA Handbook rules and must withdraw approval if it becomes aware that the promotion no longer complies.
- The FSMA (Financial Promotion) Order 2005 (FPO) includes a number of exemptions from the financial promotion restriction. These enable an unauthorised firm to communicate a financial promotion, without the approval of an authorised firm, in certain circumstances and subject to certain conditions. If a promotion can be made within the scope of an exemption, FCA’s financial promotion rules do not then apply to that promotion.
- FCA Handbook rules prescribe the requirements for financial promotions that apply to authorised firms when they communicate or approve them (financial promotion rules). This includes the overarching standard that a financial promotion must be clear, fair and not misleading. The FCA has a specific power to ban promotions which breach these rules.
Currently, any authorised firm can act as a s21 approver and approve a financial promotion for communication by an unauthorised firm. The regime was created at a time when the regulatory perimeter was narrower and authorised firms were mainly ‘traditional’ financial services firms. Such firms would therefore have generally been expected to have the competence and expertise needed to approve promotions falling within the scope of the perimeter and to ensure the promotions they approved were clear, fair and not misleading.
From 01 February 2023, authorised firms approving financial promotions under COBS 4 will need to comply with the following new and clarified requirements:
- the name of the approver and date of approval must be included on the face of an approved promotion;
- the approving firm must self-assess that it has appropriate competence and expertise in relation to the financial product or service to which the promotion relates, before agreeing to approve it;
- the approving firm must take reasonable steps to monitor the financial promotion on an ongoing basis, for the lifetime of that promotion, to ensure that it remains compliant with FCA rules;
- the approving firm must obtain quarterly attestations of ‘no material change’ from the firm issuing the promotion, to assist it with its ongoing monitoring obligations;
- the approving firm must take appropriate steps to identify and prevent or manage conflicts of interest in relation to its s21 approval activity.
Authorised firms need to consider their responsibilities under the Consumer Duty when approving promotions for unauthorised firms. In particular, firms will need to have due regard to their responsibilities under the Duty’s general obligations and the consumer understanding outcome. S21 approvers will need to ensure that the financial promotions they approve support retail consumers’ understanding by ensuring that they meet the information needs of customers, are likely to be understood by customers intended to receive them, and equip them to make decisions that are effective, timely and properly informed.
They should also ensure that the financial promotion is tailored to the characteristics of the customers intended to receive the financial promotion, including by reference to any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm.
The consultation is open until 7 February 2023.