Khepri's A to Z: Financial Promotions - Buy and Sell-Side Compliance

14 Sept

Introduction

This article explores the definition of a financial promotion, the restrictions on making financial promotions in the UK and touches on the new UK rules that ban incentives to invest in high risk investments.

What is a financial promotion?

The definition of a financial promotion is set out in the Financial Services and Markets Act (FSMA) and the FCA have explained their interpretation in PERG Chapter 8.

In short, a financial promotion is the communication of “an invitation or inducement to engage in investment activity” that is communicated in the course of business.

The FCA has unpicked each of the key elements of the definition (link to the FCA Handbook):

invitation or inducement (see PERG 8.4);
in the course of business (see PERG 8.5);
communicate (see PERG 8.6);
engage in investment activity (see PERG 8.7); and
having an effect in the United Kingdom (see PERG 8.8).

Restrictions on making a financial promotion

FSMA (Section 21) restricts the communication of financial promotions in the UK and in summary, they can only be made by:

an authorised person;
un unauthorised person where the communication has been approved by an authorised person (often called a “Section 21 Approval”); or
if an exemption is available (e.g. one of those set out in the Financial Promotions Order).

Available exemptions

It is not possible to list all the potential exemptions but the common ones we find are used include:

promotions made by an Appointed Representative were they are for the purpose of the business for which they are exempt from obtaining a direct license from the FCA;
high-net-worth / sophisticated investor exemption; and
large enterprise exemption.

See PERG 8.11 to PERG 8.17 for more details.

Made Rules: Incentives Ban

The recently effective rules introduce a ban on incentives which can unduly influence consumers’ investments decisions and cause them to invest without fully considering the risks involved.

These rules are intended to capture incentives such as, but not limited to, ‘refer a friend’ or ‘new joiner bonuses’ relating to financial promotions for high-risk investments, and they apply to communications made to retail investors including high-net worth and sophisticated investors.

However, the rules do not intend to impact business to business relationship such as those operated by affiliates or comparison websites

To avoid damaging the crowdfunding sectors, the rules exempt products and services provides by the issuer of, or borrower under, the relevant investment. For example, a company raising funds on a crowdfunding platform can provide discounts to investors on the produce it produces (e.g. a good). These goods or services must be ‘real economy’ goods or services. A firm which sells bonds cannot include free or discounted bonds as part of the promotion.

The FCA has provided the following non-exhaustive guidance on the use of monetary and non-monetary incentives for RMMI (COBS 4.12A.8 and 9) and NMMI (COBS 4.12B.17 and 18):

Offering bonuses when investing in a HRI
Offering bonuses where the client refers another person
Offering cashback when investing in a HRI
Offering discounts when investing a particular amount in a HRI
Offering free gifts once an investment has been made
Offering an additional free investment or offering discounts on investments

For the avoidance of doubt, information and research tools do not constitute non-monetary incentives.

Quarterly Consultation: Incentives Ban

In Quarterly Consultation CP 23 / 14 the FCA proposed additional guidelines which would help firms determine whether a benefit is an incentive to invest. They gave the following examples:

Intrinsically connected with the investment: A benefit which is intrinsically connected with the investment or investment activity that is the subject of the financial promotion is unlikely to constitute an incentive; for example, voting rights which are inherently connected with a share. However, a benefit which is entirely separable from the investment or investment activity that is the subject of the financial promotion is likely to be an incentive.
Longevity: A benefit which is only available for a fixed period of time, or is contingent upon investing in a restricted mass market investment in the future, is likely to constitute an incentive.
Available to all: A benefit which is only available to retail clients who invest through a particular channel is likely to constitute an incentive; for example, a benefit which is only offered to retail clients who invest via a social media link.

The FCA go on to say that this should apply irrespective of the nature of the investment activity. This means that the rule applies not only in relation to incentives to buy restricted mass market investments but also, for example, to incentives to enter into agreements for the purposes of transacting in restricted mass market investment.

FCA Handbook Summary of Applicable Rules

There are various additional rules over and above those relating to incentives and these are set out in the tables below.