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Dear CEO | Release Date: 11th April 2019

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has issued a directive in the form of a “Dear CEO” letter to chief executives of firms that are involved in the approval of financial promotions for unauthorised entities. This letter serves as a stern reminder and reinforcement of the obligations these firms have under current regulatory standards, particularly emphasising the need for promotions to be fair, clear, and not misleading. The communication underscores the significant responsibility these firms hold in safeguarding the integrity of financial markets and protecting consumer interests, especially in the realm of retail investment products such as mini bonds.

Background and Regulatory Context

The FCA had previously communicated on 9 January 2019, through a formal letter, the essential responsibilities firms hold concerning the use and approval of financial promotions. This prior communication aimed to clarify the regulatory expectations and the importance of compliance in the promotion of financial products by unauthorised persons. Despite these detailed guidelines, subsequent observations and reviews by the FCA have revealed ongoing deficiencies and lapses in the due diligence processes employed by some firms, which necessitated another formal reminder.

FCA’s Expectations for Financial Promotions

Ensuring Fair, Clear, and Non-misleading Communications

The FCA stresses that all financial promotions must adhere to strict standards of fairness, clarity, and honesty. This is particularly crucial for products like mini-bonds and other types of retail investment products that are inherently complex and carry high risks. The promotional material must not only be straightforward but must also adequately disclose the risks and realistically present the potential returns without embellishment.

Detailed Guidance on Yield and Returns

According to the FCA’s Handbook (COBS 4.2.4G), it is imperative that financial promotions that quote potential yields provide a balanced view of the investment’s prospects over both the short and long term. This ensures that investors receive a comprehensive understanding of what the investment entails, aiding them in making informed decisions.

Restrictions on Investor Participation

The direct offer of financial promotions concerning unlisted securities is generally restricted to specific investor classes, including high-net-worth individuals, sophisticated investors, or “restricted investors” who have declared that they are not allocating more than 10% of their net assets in non-readily realisable securities. Firms that communicate or approve such financial promotions must rigorously ensure that these restrictions are observed and that all rules regarding the appropriateness of the investments for each investor are strictly adhered to.

Compliance Obligations and Procedures

Validation of Compliance Before Approval

Prior to approving any financial promotion for dissemination by an unauthorised entity, firms are required to confirm adherence to the FCA’s financial promotion rules (COBS 4.10.2R(1)). Should there be any change in circumstances or new information that renders the promotion non-compliant, firms must promptly withdraw their approval (COBS 4.10.2R(2)).

Implementation of Robust Systems and Controls

Firms must have effective systems and controls in place to ensure ongoing compliance with the financial promotion rules (COBS 4.10.1G). This includes the accurate presentation of information and the fair and prominent indication of any relevant risks when referencing potential benefits (COBS 4.5.2R(2), COBS 4.5A.3EU).

Enforcement and Oversight by the FCA

The FCA has made it clear that it will take decisive action against firms that fail to comply with the regulations governing financial promotions. This can include the amendment or removal of financial promotions, suspension or cancellation of the issuance of products, placing formal restrictions on the activities of non-compliant firms, and possibly initiating civil or criminal proceedings.

Conclusion and Takeaways

Proactive Compliance and Review

Firms are urged to proactively review all financial promotions they have previously approved to ensure ongoing compliance. They must also self-identify and report any issues with these promotions to the FCA, demonstrating a commitment to regulatory adherence and consumer protection.

Enhancement of Governance Structures

Continuous improvement of governance structures is crucial. Firms should strengthen their oversight and due diligence processes to prevent any future failures that could lead to non-compliance with FCA regulations.

Preparedness for Regulatory Scrutiny

Firms should anticipate and prepare for increased scrutiny from the FCA. Engaging cooperatively with regulatory reviews and inquiries will be vital in maintaining compliance and upholding the standards set forth by the FCA.

This “Dear CEO” letter serves as a critical call to action for all firms involved in approving financial promotions for unauthorised persons, highlighting their pivotal role in ensuring the stability and integrity of financial markets through rigorous compliance with regulatory standards.

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