Delio warns private markets firms to act now as FCA launches enhanced financial promotions regulations alongside Consumer Duty guidanceSam Roberts
- The Financial Conduct Authority’s (FCA’s) enhanced financial promotion regulations affect every financial institution regulated by the FCA, including those offering or launching alternative assets propositions.
- The regulations create significant operational and regulatory challenges for firms, with some coming into force from December 1, 2022.
- In the most serious cases, penalties for failing to comply could include criminal prosecutions, unlimited fines and compensation to investors affected by non-compliant promotions.
- Many firms are digitising their investor profiling and financial promotions processes to mitigate additional operational and regulatory risks.
The FCA’s enhanced financial promotions regulations that all regulated institutions must comply with begin to take effect this week, and fintech Delio is warning firms that offer their clients access to alternative assets to ensure that their regulatory processes comply with the new rules in order to avoid the risk of unlimited fines or criminal prosecution.
The Financial Promotion Regime changes come hot on the heels of the Consumer Duty guidance, which focuses on firms improving the outcomes for retail investors. It includes cross-cutting rules that require firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
Part of the regulator’s move, both in respect to Financial Promotion and the Consumer Duty guidance, is designed to help protect customers from being exposed to inappropriate risk. In respect to financial promotions of high risk investments, all firms regulated by the FCA must not only comply with the new regulations, but prove they are doing so. If organisations are unable to clearly demonstrate their compliance, they could face regulatory sanctions. Delio has summarised the key points in a briefing note available via their website.
The latest measures represent a further tightening of regulations around high-risk investments, which includes alternative assets. This trend is being seen across regulatory jurisdictions worldwide as an increasing number of investors turn to private markets to diversify their portfolios and achieve inflation-busting returns.
The FCA’s policy statement PS22/10 – Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions – outlines the changes that firms must adhere to. They fall into three main categories:
- The FCA’s classification of high-risk investments;
- The consumer journey into high-risk investments;
- Strengthening the role of firms approving or communicating financial promotions
These updated regulations fundamentally change the way that firms can promote alternative assets to retail investors and the procedural checks that they must pass before they can complete an investment.
By December 1, 2022, regulated institutions must include a highly visible risk warning when promoting any high risk investment to an audience that could include retail investors. The exact wording will depend on the status of the firm issuing the promotion and whether the warning is online or offline.
By February 1, 2023, a personalised risk warning must also be included which is accessible the first time a direct offer financial promotion is made to the retail client. Firms will also need to implement several other measures including more robust categorisation of investors, investor appropriateness tests, and a 24-hour cooling off period during the investment process to prevent clients from making snap decisions.
Gareth Lewis, co-founder and chief executive of Delio, said: “This is the FCA putting our industry on notice that it will not tolerate inappropriately targeted promotions that could put investors’ money at a higher level of risk than they anticipated.
“Firms offering their clients access to private markets need to take action now, as they have immediate regulatory deadlines to meet. This is why institutions using Delio’s technology have already had their governance processes updated to comply with the regulations that go live on 1st December.
We’re also seeing firms accelerate the digitisation of their regulatory operations so that they can continue to service the rising client demand for alternative assets while meeting their increasingly complex regulatory obligations in a robust, effective and efficient way.”
Delio’s private markets technology has already been updated to enable firms to add risk warnings to financial promotions that are required by 1st December. Future product releases will enable users to configure their platform to meet all of the governance standards that firms need to comply with by 1st February 2023.