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Dear CEO Letter: Unregulated Business & Financial Promotions

14 January 2019

Dear CEO Letter – Clarity in Financial Promotions & Unregulated Business

Last week the FCA published a Dear CEO Letter to all regulated firms in relation to the use of financial promotions and a firm’s responsibilities in this regard.

The reason this has now been issued is that the regulator has recently become aware that some firms have been issuing financial promotions which suggest or imply that all of the activities they undertake are regulated by the UK regulators, when in fact they are not.

This Dear CEO Letter therefore reminds senior managers and the board of what constitutes “fair, clear and unambiguous financial promotions.”

What can be a Financial Promotion?

As we have spoken about previously, financial promotions can be any form of communication that invites or induces engagement in investment activity. Thus, this could be in the form of a website, Facebook post, tweet, newspaper or TV advert etc. Financial Promotions can form a significant part of a consumer’s product knowledge, and can influence a consumer’s decision making when choosing a product. Therefore, to ensure that consumers can make informed decisions, it is very important that financial promotions are fair, clear and not misleading.

Therefore, regardless of media type, all financial promotions must be clear, fair and not misleading.

Promoting Unregulated Business

Within the Dear CEO Letter, of particular note was the regulator’s reminder of rule GEN 4.5.4R that states

• GEN 4.5.4R: A firm must not indicate or imply that it is regulated or otherwise supervised by the FCA in respect of business for which it is not regulated by the FCA.

The Executive Director of Supervision at the FCA said last week. “It is completely unacceptable for firms, which are regulated for some of their business, to market unregulated investments by implying to customers that all their business is regulated. We are committed to stamping out this misleading practice and recommend that customers should ask firms whether what they are buying is really regulated by the FCA.”

Financial Promotions: Promoting Overseas Affiliates

Where firms are promoting their overseas affiliates, they should remember to remain vigilant and compliant with the applicable FCA rules, and in particular, those rules detailed within COBS 4.9 for Financial Promotions with an Overseas Element.

For example, unless a financial promotion makes it clear which firm has approved or communicated it, then it is not compliant with COBS 4.9.3R. Furthermore, the promotion may require accompanying explanation relating to the applicability of the protection of retail clients and the extent and level of any compensation scheme if available.

Product intervention measures & Financial Promotions: CFD & Spread Betting

With regulators paying particular attention to the CFD and Spread bet markets at present, CFD and spread bet providers should pay particular attention to their communications with investors and potential investors.  Product intervention measures have been in force since August last year that restrict the marketing, distribution and sale of CFDs, including rolling spot forex and financial spread bets to retail clients. Therefore, firms that promote CFD and Spread bet activities should tread carefully and be absolutely certain they are fully compliant with all applicable regulatory requirements before approving any communication that could be seen as a financial promotion.

Under the current product intervention measures, CFD and spread bet providers must:

• Not offer monetary and non-monetary inducements to encourage trading; and
• Provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.

In addition, ESMA’s product intervention measures have a ‘no circumvention’ clause that expressly prohibits knowingly or intentionally participating in activities, the object or effect of which, is to circumvent their product intervention requirements. Thus CFD and Spread bet Firms should therefore be reminded to pay close attention to their actions if promoting CFDs for overseas affiliates, should their actions be seen to be trying to circumvent ESMA’s intervention.

Next Steps:

The Regulator has encouraged all firms to read and reflect on the contents of their Dear CEO Letter and be sure that they understand the FCA’s rules on financial promotions. Firms need to ensure their communications comply with the FCA rules on financial promotions and that they are fair, clear and not misleading before being approved.

Firms should also bear in mind that, depending on the product type they are promoting e.g. the CFD and Spread Bet example above, financial promotions may also need to comply with other specific rules and regulatory requirements.

Whilst is a firm that has to ensure their financial promotions remain compliant, the FCA has reminded firms that they monitor adverts across all types of media in the UK and that should it be required, they have the power to ban a promotion or advert.

Related reading:

• Financial Promotions: Communicating via Social Media
• CFD Product Intervention Measures

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.