FCA pushes back against misleading financial promotions

by Nick Tidmarsh

On 9 January 2018, the Financial Conduct Authority (“FCA”) sent a letter to the CEOs of all its regulated firms expressing concern over recent financial promotions that wrongly suggested that all of a firm’s activities were regulated by the FCA and/or the Prudential Regulation Authority (“PRA”), when in reality they were not regulated.

Jonathan Davidson, the FCA’s Executive Director of Supervision – Retail and Authorisations, commented that it was “completely unacceptable” for firms “to market unregulated investments by implying to customers that all of their business is regulated”, adding that the FCA is committed to ending this practice.

The FCA additionally recommended that customers should ask firms whether the particular service they are buying is regulated by the FCA.

Financial promotions

Financial promotions are defined as invitations or enticements aimed at customers to engage in investment activity through a firm. Advertising is the obvious example of such communications, but other forms of promotion include marketing brochures, statements on firms’ websites, or their social media posts. Under COBS 4.2 of the FCA handbook, these financial promotions must be ‘fair, clear and not misleading’.

It is crucial when drafting a financial promotion to be transparent about the extent to which the firm is regulated by the FCA or PRA: a failure to do so will amount to being ‘misleading’. It is not uncommon for only part of a firm’s business to be regulated, in which case the firm should clarify which parts in its promotions. Merely implying that an activity is regulated when it is not, or failing to indicate that an activity is not regulated by the FCA, can fall foul of the FCA rule GEN 4.5.4R of the General Provisions manual.

The risks for non-complying firms

The onus on ensuring that advertising is compliant with FCA rules lies upon the firms, as the FCA simply monitors – it does not preapprove. However once the FCA discovers a misleading promotion, it can warn firms, remove the promotion from the public eye under section 137S of the Financial Services and Markets Act 2000, and/or take enforcement action against the firm and its senior management.

Given the clear harm posed to the misinformed public, firms can incur more serious penalties. Misleading statements can amount to a criminal offence, and there is a right of action for damages for anyone suffering a loss as a result of the misleading information.

Commentary

Regulated firms, and in particular their senior managers, should heed the warning that the FCA is sending through this “Dear CEO” letter. If firms do not understand and comply with the rules on financial promotions, they could face at best the removal of their adverts and public shaming from the FCA, and at worst criminal sentencing and pay-outs to misled customers.

In particular, senior managers and boards have a responsibility to confirm a financial promotion complies with FCA rules, when that promotion is being delivered to the public by an unauthorised person.

The ramifications mentioned here are not remote threats. As recently as November 2018 the FCA had the promotions of London Capital & Finance Plc (“LCF”) relating to a Fixed Rate ISA or Bond withdrawn. In addition all of LCF’s regulated activities have been suspended, and they are being investigated by FCA’s enforcement division.

By aiming this warning at CEOs, the FCA reminds senior managers of its power to discipline them personally (through fines, bans from regulated activity etc.) We recommend that senior managers recognise their responsibility and pre-emptively ensure their firm’s compliance with FCA rules.

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