Financial promotions: the right side of the rules
ICAEW Regulation and Conduct
Protecting the public by ensuring ICAEW regulated firms and members retain the highest standards of professional conduct
The regulatory requirements around making financial promotions are complex. We look at the core principles and offer some tips to help you avoid falling foul of the rules when you’re communicating with clients about investment opportunities.
The way in which you can communicate or present potential investment opportunities to your clients is highly regulated. This protects your clients from misleading or inaccurate promotions and ensures investment information is sufficiently clear and accurate for them to make informed investment decisions.
“If you haven’t carefully considered how you’re contacting and communicating with clients about potential investments – whether by phone, on your website or in brochures – you are potentially putting clients at risk,” says Phil O'Halloran, Case Manager, ICAEW.
“It's quite easy to go down the road of making a promotion and not knowing it,” he adds. “And you may even be in breach of the law. For example, you might, in theory, be getting into the realms of a financial promotion when you merely talk about a potential investment at lunch with somebody who could be interested in investing in your client’s business.”
WHAT IS A PROMOTION?
A financial promotion is defined in Section 21 of the Financial Services and Markets Act 2000 (FSMA) as ‘an invitation or inducement to engage in investment activity, communicated by a person in the course of business’.
Under the general restriction in Section 21 of the Act, only firms authorised by the Financial Conduct Authority (FCA) can issue or approve a financial promotion.
The Financial Promotions Order (FPO), the statutory instrument which brings the legislation into force, does, however, contain a large number of exemptions allowing unauthorised firms (which includes ICAEW firms with DPB licences) to issue promotions to certain recipients in specific circumstances.
“In terms of financial promotions, when you're communicating with your clients, you should be thinking about whether you could be inviting or inducing them to engage in a regulated activity,” says O'Halloran.
“If you are, then you need to consider whether you can do it, because if you're not directly authorised by the FCA, then you need to be able to rely on an exemption in the FPO,” he explains. “And if it's not exempt, and you're not authorised, or it hasn’t been approved by an authorised person, you run the risk of engaging in criminal activity.”
The FPO defines the ‘controlled activities’ and ‘controlled investments’ for the purposes of Section 21 of the Act. In order for a communication to constitute a financial promotion this must involve a controlled activity, e.g., advising on investments, being performed in conjunction with a controlled investment, e.g., shares or share capital of any body corporate, and invites or attempts to encourage or persuade investors to purchase an investment.
The restriction on promotions applies to any form of communication whether written or oral. Communications can be real time or non-real time and solicited or unsolicited. A real time communication would include telephone calls, personal visits or meetings; while non-real time covers things like brochures, letters, websites or emails.
If a communication is initiated by a client receiving the promotion, or takes place in response to a request from that client, it is solicited. An unsolicited communication is one made without express invitation where you think there’s an opportunity for your client. Greater protection is afforded to consumers where the communication is unsolicited and made in real time. The first step is always to consider whether or not you are making a promotion. This will involve looking carefully at the purpose of the communication.
“If you've decided that a communication is a promotion because it contains an element of persuasion or incitement to enter into an investment agreement, then you need to ask: Can I do this?” says O’Halloran. “This leads to looking at what exemptions are available,” he explains. “But if you are unsure whether you are able to use an exemption, you either have to step back or get it signed off by an authorised firm. The exemptions are complicated, but there are a large number within the FPO which should allow firms to undertake a range of communication without the need for FCA authorisation.”
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EXEMPTIONS
There are a number of exemptions in the FPO that firms could use, depending on whether the communication meets the terms of the exemption. But firms need to be careful that they comply with the terms of any exemption. Whilst there are some exemptions which are applicable to all controlled activities, there are others which are more limited in scope.
“There are two exemptions, Articles 55 and 55A, that have been specifically designed for DPB (Investment Business) licensed firms,” explains O’Halloran.
Article 55 allows you to make solicited or unsolicited real-time communications to clients about a regulated activity. This is provided by the DPB licence, provided you have already been engaged to provide professional services and is a regulated activity, but for the exclusion in Article 67 of the Regulated Activities Order. Article 67 excludes certain types of regulated activity which are carried on in the course of a profession or business and which form a necessary part of other services provided in the course of that profession or business.
Article 55A allows you to make a non-real time promotion about a DPB activity subject to this, including a specified statement about the firm's DPB status under the FSMA. This means that a firm can issue brochures, websites, etc. without any need for approval by an FCA authorised firm.
There are other exemptions in the FPO which any firm can use. The ones that are likely to be relevant to DPB firms’ activities are, for example, those which involve communications made to investment professionals, high net worth individuals and companies, sophisticated investors (Articles 19, 48, 49, 50) or where the communication relates to the sale of a body corporate (Article 62). If these exemptions aren’t available, you may be able to rely on the ‘one off’ exemption (Article 28 and Article 28A) in situations where the communication is personal to the recipient, and you reasonably believe that they would expect to be contacted by you in relation to the investment activity to which the promotion relates.
GET ADVICE
The regulatory regime around financial promotions is ultimately designed to protect all parties. It's in everybody's interest to follow the rules, both to protect clients from risky investments and prevent firms inadvertently becoming professional enablers and falling foul of the law.
“This is a complex area so if you have any doubts about whether or not your promotion comes within an exemption, the safest option is always to get it approved by an authorised firm or get specialist advice,” says O’Halloran.
In the first instance, you could contact ICAEW’s Technical Advisory Service, which can only give general guidance.
If you are unsure about a particular case or scenario, you could consult the FCA’s Handbook or seek advice directly from the FCA or a legal expert on financial promotions.
RESOURCES
ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.
Complete article can be found on ICAEW | Regulation:?Financial promotions: the right side of the rules