In general terms speculative illiquid securities are debentures or preference shares with a denomination of less than £100,000 where, the proceeds are lent to third parties, used to buy or acquire investments or used to buy or fund the construction of property.
The FCA ban of the mass-marketing of speculative illiquid securities to retail investors (PS20/15) followed feedback from consultation (CP/20/8) but does not prevent FPO exempt promotions to certified high net worth individuals, and sophisticated and self-certified sophisticated retail investors. The FCA consider the FPO exemptions not to allow mass-marketing to the public.
There may be further significant change in this area of the market following the FCA’s consultation earlier this year. The consultation follows a course set by various publications, including the HM Treasury’s Regulatory framework for Approval of Financial Promotions Consultation in July 2020, which suggests reform through the removal of the ability of authorised firms to approve financial promotions of unauthorised firms and/or greater FCA regulatory intervention;
Policy option 1 would give the FCA power to impose requirements to prevent all existing authorised persons from approving the financial promotions of unauthorised persons by amendment of s.21 FSMA.
Policy option 2 amounts to the approval of an unauthorised person’s financial promotion becoming a new regulated activity by amending RAO.
The FCA’s discussion paper DP/21/1 focuses on three main areas where the FCA intends to strengthen its financial promotion rules:
The classification of high-risk investments. Should more types of investments should be subject to marketing restrictions?
Further segmenting the high-risk investments market by greater separation between high risk, and other, investments. Should improvements be made to risk warnings for consumers? Should consumers be required to watch educational videos or to pass an online test in order to demonstrate sufficient knowledge about financial products before investing?
The approval of financial promotions. Should be more requirements for firms which approve financial promotions for unauthorised persons to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading?
While the outcome of the consultation is unknown, and the direction of policy uncertain, it seems inevitable that further regulatory intervention will follow. Those involved in financial promotions should be aware of possible future developments.