Financial promotion rules, covered by COBS 4.2, is a basic foundation of financial regulations in the UK. There are many requirements for firms to meet, but it ultimately boils down to three simple criteria: promotions must be clear, fair and not misleading.
However, simplicity isn’t enough and – as we’ll explain – a perfect storm has been brewing for months over how financial promotions are regulated. And, in 2020, the heavens might open.
A lot of this stems from the London Capital & Finance (LCF) scandal last year, when the high risk lender collapsed and it was revealed over 11,000 investors had lost money on highly risky minibonds they had been sold. Although minibonds are not covered by regulation, LCF needed to be regulated to promote them and it was since revealed these products were incorrectly promoted to investors.
Why did this happen? Because each sale of a minibond carried with it a 25% commission, and according to the administrator on the case over £60m was gained in sales bonuses. An estimated £236m has been lost by investors on these minibonds and the collapse by LCF has been followed by arrests from the Serious Fraud Office (SFO), ongoing criminal investigations and an embarrassing period of self-reflection by the FCA. The promotions linked to these minibonds were anything but clear, fair and not misleading.
What happened next?
The FCA has been blamed for failing to properly monitor and regulate LCF before its collapse and to some extent, the regulator has accepted responsibility and last year an independent investigation was launched by the FCA’s board. With thousands of angry investors to answer to, focus inevitably came down on financial promotions and how they were regulated.
In the FCA’s annual general meeting, FCA chief executive Andrew Bailey said there was a “strong case” for reviewing the system and bringing all activities (even those not regulated) under the same regulated umbrella. He said:
“The problem with the promotion regime, is regulated firms don’t need to tell us they are doing it. With the internet these promotions have taken off. I am sure many of you receive these promotions quite regularly, I do.”
Bailey’s sentiments were echoed by FCA chair Charles Randell in September 2019 when he used a speech to call for a review of financial promotion regulation. He told delegates: “The financial promotions regime is ripe for re-examination. Approving financial promotions is not a regulated activity although only FCA authorised firms may do it. But they don’t have to have any special qualifications or permissions.
“They don’t have to report to the FCA on the promotions they approve. The rubric which appears on financial promotions – such as ‘capital at risk’ – doesn’t help investors distinguish between a low cost, lower risk diversified listed equity fund and a high cost, much higher risk minibond. It’s yet another area which deepens confusion about the scope of regulation.”
In response, the FCA took the encouraging (and some would say refreshing) step of consulting with new perspectives and sat down with search engine giant Google. Scammers are adept at designing and creating promotions that use search engines like Google to get in front of potential victims. The FCA, arguably slow at times to adapt to change, was being proactive and trying to learn more about what it could do in terms of collaborative approaches.
When the storm hits...
However, this year it has already been leaked that this has come to a dead end. It was recently revealed that Bailey admitted in internal emails there were numerous ways around their rules with the use of Google Ads. And, perhaps unhelpfully, both Google and the FCA are adamant they are both doing enough to stop these scammers and the other party should do more.
However, this long-running issue could be meeting a climax in 2020. The thousands of LCF investors, understandably angry and frustrated, are not quietening their efforts for justice. Protests and action groups have been organised and, with the FCA unable to quell their anger, the government has been called on to do more. With added pressure, the FCA will be even more determined to rectify this area and hopefully stop another LCF from happening.
What could cause this perfect storm to erupt? Well, in March of 2020 Andrew Bailey will leave the FCA’s offices in East London and take up his new role on Threadneedle Street as Governor of the Bank of England. Heading up the regulator is a thankless job but many criticisms have been levelled at Bailey for his time as FCA CEO, given the LCF collapse and the infamous Woodford gating scandal happened on his watch.
Whoever replaces him will have a lot of priorities to attend to. As well as monitoring and supervising a growing and complex financial services industry, the space is evolving rapidly in new and fantastic directions that legislation needs to account for – not to mention, Brexit could influence regulation in untold ways. And even though many may argue that financial promotions are ok as they are, and instead more should be done to tackle the scammers not the compliant majority, it has already been clearly flagged as a target for the FCA’s regulatory agenda. A new CEO might view this area as an obvious target to kickstart their tenure with.
Where does this leave you?
You can’t comply with regulations before you know what they are and it’s a fools errand to try and second guess what the regulator may look to outlaw or introduce in the future. Rather, emphasis should be paid to what you are already doing and it is critical your compliance department have the correct systems and processes in place to ensure regulations are being complied with (and crucially evidence is being created of this). This is where a web archiving solution, such as the MirrorWeb Platform, is extremely valuable in providing compliance confidence to firms.
At MirrorWeb, we regularly produce insightful content to help compliance and marketing professionals stay abreast of the latest developments in the industry. As well as subscribing to future blogs, why not visit our recent comprehensive eGuide on how marketers can balance personalisation with mounting regulations? Read the full eGuide for free by clicking the below.