FCA fires warning shot over approval of financial promotions

​In a Dear CEO letter published on 11 April 2019, the FCA sends out a further warning shot that it will take action where necessary against firms which approve financial promotions for unauthorised entities without having performed the due diligence to ensure that the promotion is fair, clear and not misleading.

Introduction

The FCA’s Dear CEO letter of 11 April 2019 (the April letter) was addressed to all firms which are engaged in approving financial promotions of retail investments. It follows on from, and reinforces, the FCA’s earlier Dear CEO letter of 09 January 2019, reminding firms that, before they approve a financial promotion for communication by an unauthorised person, they must confirm that it complies with the FCA’s rules on financial promotions. This includes, in particular, ensuring that the financial promotions which they approve are fair, clear and not misleading.

The FCA explicitly warns that it will take action where it sees non-compliance with its rules by firms which approve promotions - the measures available to it include:

  • the amendment or removal of financial promotions
  • the suspension or cancellation of planned issuance of the product to investors
  • formal limitations being placed on the activities of the firms which approved a non-compliant promotion, and
  • the possibility of civil or criminal proceedings.

FCA’s warning to firms

The April letter is specifically intended to underline how seriously the FCA treats this issue - despite its warning in January, the FCA notes its concern that it is still seeing instances where the due diligence carried out on a financial promotion appears to fall “well short” of the expected standard.

Although the April letter uses, as its main example, an FCA authorised firm approving the financial promotions of mini-bonds (a type of retail investment product which can be issued by firms that the FCA does not regulate), we believe the letter should be seen as a warning shot for the industry more widely and firms should take heed of a number of specific points made. These include:

  • the importance of ensuring that, where the financial promotion concerns a retail investment product, the due diligence performed is appropriate to reflect the increased risks of detriment that such promotions carry, and
  • firms approving financial promotions under s.21 of FSMA 2000 can expect the FCA to require them to demonstrate that they have carried out proper due diligence to ensure that the promotion is fair, clear and not misleading, even when the product is not regulated or is issued by a company that is not FCA-authorised.

Guidance on the issues a firm should consider can be found at COBS 4.2.4G.

Lessons firms should learn

The FCA’s letter further reminds firms that

  • before it approves a financial promotion for communication by an unauthorised person, the firm must confirm that the promotion complies with the financial promotion rules
  • if the firm becomes aware at any time that the financial promotion no longer complies with the rules, it must withdraw its approval
  • if the firm communicates or approves a financial promotion, it must have put in place adequate systems and controls, or policies and procedures, to comply with the FCA rules and
  • the firm must ensure that information presented is accurate and always gives a fair and prominent indication of any relevant risks when referencing any potential benefits.

Finally, where the FCA identifies concerns with a firm’s due diligence of a financial promotion, the firm can expect the FCA to

  • examine what governance and oversight failures may have contributed to this
  • assess who is responsible
  • assess what steps the firm has taken to review financial promotions it has previously approved, and
  • assess the extent to which the firm has self-identified and reported issues with such promotions or with promotions which it has declined to approve.

Conclusion

Coming on the back of the letter of 09 January, it is abundantly plain that the FCA’s patience with firms failing to comply with its expectations and requirements is fast running out.

It is clear that, following two Dear CEO letters on the same topic within the space of a few months, the FCA has fired an important warning shot across the industry’s bows.

The sanctions available to the FCA against firms found to be falling short of these expectations in future can be severe and a non-compliant firm would run the risk of significant reputational damage.

If you require any assistance with questions regarding the contents of the FCA’s letter, please do not hesitate to contact us.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.