Financial Promotions for high-risk investments

Multi-firm reviews Published: 27/09/2023 Last updated: 20/05/2024

We outline the findings of our review of how firms offering restricted mass market investments (RMMIs) have complied with new rules on the customer journey. We identify examples of good and poor practice for the wider sector to consider and make any necessary changes to their own practices.

Who this applies to

These examples will be of interest to: 

  • firms promoting restricted mass market investments to retail consumers
  • firms promoting non mass market investments (NMMIs) to retail consumers
  • firms intending to promote relevant cryptoassets to UK retail consumers when the financial promotion rules for cryptoassets come into force

What we looked at

Why we did this

In August 2022, we published PS22/10 - Strengthening our financial promotion rules, which outlined new requirements for firms promoting high-risk investments (HRIs) to retail clients. The initial rules, requiring risk warnings on financial promotions, went live on 1 December 2022 and the remaining rules on 1 February 2023. 

These rules are important for preventing harm to consumers from investing in HRIs that do not match their risk appetite. Our rules are designed to ensure that firms communicating and approving financial promotions for HRIs do so to a high standard, ensuring consumers receive high-quality financial promotions that enable them to make effective, well-informed investment decisions. 

Following a review of the risk warnings of firms within the Peer-to-Peer and Investment Based Crowdfunding (IBCF) portfolios in December 2022 we found that the level of compliance was far below the standard we expect. This was reported in our financial promotions quarterly data for Q1 2023. As a result, we looked more deeply at how firms had implemented the remaining rules from 1 February 2023. 

What we did

We chose a sample of 13 firms of different sizes from within the Peer-to-Peer and IBCF portfolios for this review. We asked them to give us information on their onboarding journey and conducted virtual or in-person visits with each firm to discuss their approach. 

We reviewed the approach of the firms to each of the conditions set out in COBS 4.12A:  

  • incentives to invest
  • cooling off period
  • risk warnings
  • client categorisation
  • appropriateness

Our expectations

We expect all firms promoting RMMIs and NMMIs to consider the findings of our review for their businesses. We also expect firms promoting relevant cryptoassets to UK based consumers to consider these findings due to the requirements set out in PS23/6 - Financial promotion rules for cryptoassets. PS23/6 sets out how the rules for RMMIs will apply to qualifying cryptoassets from 8 October 2023. 

Our strengthened financial promotion rules set a minimum baseline for firms that promote HRIs and give clear guidance on what is expected. Our aim is to raise the overall standard of high‑risk investment promotions. The strengthened rules also support the approach of the Consumer Duty, by encouraging firms to consider for themselves whether they should go beyond this minimum standard, considering the needs of their customers, to deliver good outcomes.

What we found

Incentives to invest

Our rules prohibit firms from communicating or approving a financial promotion which offers any monetary or non-monetary incentive to invest in HRIs. For example, offering referral bonuses, free gifts or cashback to consumers for investing. 

We found that most firms we reviewed had withdrawn any incentives to invest before 1 February 2023. In many cases these incentives had been wound down up to 6 months in advance of the deadline.  

We also saw that some firms had amended some monetary or non-monetary incentives to no longer be available to new consumers, but new consumers could qualify for them if they stayed invested for a minimum time period. Any incentive to invest in a HRIs offered to retail clients as part of a financial promotion is prohibited under our rules, regardless of any qualifying time period. 

We have recently consulted on changes to the ban on incentives to invest in CP23/14 - Chapter 4. We will release further information on these changes in due course and firms should ensure they are compliant with any resulting changes to COBS rules or guidance. 

Examples of good practice

  • Having strong processes for oversight of any investor benefits which are exempt under COBS 4.12A.7R(2) to ensure that they are limited to products or services that are genuinely produced or provided by the investee firm.

Examples of poor practice

  • Not properly considering the full range of incentives offered by the firm against the ban, particularly those that are not paid immediately on sign up or that don’t require a consumer to invest to qualify.

Cooling-off period

Firms must include a cooling-off period for new consumers who request to see a direct offer financial promotion. This must be a minimum of 24-hours from the point that a consumer requests to see the direct offer financial promotion. During the cooling-off period the firm can proceed with other aspects of the onboarding process. At the end of the cooling-off period, consumers must be given the option to proceed with or leave the investment journey, with each of these options given equal prominence. 

The intention of the cooling-off period is to allow consumers the time to reflect on the investment and determine whether they wish to proceed with the RMMI. 

We found that all firms had implemented a minimum 24-hour cooling-off period before consumers were able to view any direct offer financial promotions, or to commit to any investments. However, multiple firms had either not included an express option to proceed with or leave the investment journey at the end of the period, or the options to leave or proceed were not given equal prominence. 

Some firms gave limited or no information to consumers on the reasons why they must wait before committing to an investment. Additionally, some firms did not inform consumers of the cooling-off period until they were a significant distance through the investment journey. 

Several firms gave consumers clear information on the reason for the cooling-off period, the time remaining until the cooling-off period expires and gave the consumer relevant information on the products available as well as the risks of those products. They gave this information at the start of the investment journey, so consumers knew what to expect. These firms felt that giving information to their consumers reduced frustration and led to better customer engagement and outcomes. 

Examples of good practice

  • Giving clear information that there is a cooling-off period, and the reason for the cooling-off period. 
  • Giving clear information once the cooling-off period has ended. 
  • Blocking the consumer from being able to view investment opportunities during the cooling-off period to allow consumers to make a considered decision on whether to proceed.

Examples of poor practice

  • Not giving consumers the express option to proceed with or leave the investment journey at the end of the cooling-off period. 
  • Giving greater prominence to the option to proceed with the consumer journey, compared to the option to leave. 
  • Having inconsistent cooling-off arrangements across different communication channels. For example, options communicated by email differ from those displayed online.  
  • Requiring consumers to take additional steps to leave the investment journey compared to proceeding with it. For example, being required to provide further confirmation to leave the journey (such as an ‘are you sure?’ question) but not to proceed with it.

Risk warnings

We saw that firms often gave the personalised risk warning later in the journey, after the consumer had completed the categorisation and appropriateness assessment. This was usually presented to consumers once the cooling-off period had expired. A warning to remind consumers of the risks of the investment at the point of committing to the investment may be helpful. But firms should ensure that they give a personalised risk warning at the required point in the onboarding journey. 

We also found some instances where the personalised risk warning did not meet the prominence requirements or did not present options to proceed with or leave the investment journey with equal prominence. 

We found that most firms included the correctly worded risk warning within their financial promotions, however these did not always meet our expectations for prominence. The warning was often hidden behind truncated text in social media posts. Risk warnings in emails were included at the end of the promotion, but font sizes and colours did not draw attention to them or included backgrounds that did not sufficiently distinguish the warning from the rest of the promotion.  

We heard from multiple firms that their marketing teams didn’t agree with the prominence of risk warnings, as this would put off potential investors. Our rules are designed to ensure that risk warnings capture consumers’ attention and enable them to make effective, well-informed investment decisions. We are prepared to take robust action with firms that do not comply with our requirements. 

Some firms linked to risk summaries which were amended appropriately for their products. Some firms that offered different products with significantly different risks gave different risk summaries for each product type. Firms may make appropriate alterations to their summary as long as these are compliant with COBS 4.12A.44R(2). This means there must be a valid reason for the amendment, there must be a record of this, the changes are in plain English, and the summary takes approximately 2 minutes to read 

Since we started our review, we have published a social media guidance consultation. We encourage firms to review this and consider their policies for social media promotions.  

Examples of good practice

  • Including additional warnings at points in the journey where the firm felt it would aid consumer understanding of the risks. 
  • Firms offering multiple RMMIs have altered their risk summary appropriately for their products. Where the products are significantly different, the firm gives different risk summaries for each product type. 

Examples of poor practice

  • Changing the wording of the risk warnings to deviate from the wording prescribed in the rules. 
  • The risk warnings not meeting prominence requirements or including design features that reduce the prominence of the risk warnings.

Categorisation

Most of the firms reviewed had implemented a robust process for ensuring consumers were able to self-categorise appropriately and provided correctly worded categorisation statements. We saw that consumers - in most cases - are given clear and accurate information to help them select the most appropriate category for themselves. 

Several firms had gone beyond the requirements set out in PS22/10. They gave consumers additional information and resources to help them self-categorise at the most appropriate level. However, we also saw examples where firms are guiding consumers through the process by indicating the information that the consumer needs to give to proceed. When done inappropriately, this might steer consumers towards a category that does not appropriately reflect their circumstances. 

Some firms had changed the title or description of the investor categories in a way that inappropriately downplayed the risk of investing in RMMIs. Firms must use the investor categories and related statements specified in our rules. 

Firms should not ignore information from the consumer suggesting that they may be incorrectly categorised.  

Examples of good practice

  • Using additional resources such as Companies House or the FCA Register to verify information provided by consumers self-categorising as sophisticated. 
  • Providing additional tools to help consumers understand and calculate their net worth. 
  • Where consumers do not meet the criteria of the available categories, informing them that the RMMI is likely not appropriate for them and to consider seeking financial advice. 

Examples of poor practice

  • Consumers who indicate they do not meet the criteria for any of the available categories are invited to repeat the categorisation, rather than being informed that the investment is probably not appropriate for them. 
  • Pushing or leading consumers through the categorisation process by suggesting responses that meet the criteria of the category instead of allowing the consumer to volunteer the information. 
  • Pre-categorising consumers by assuming a category based on information already given to the firm and immediately placing the consumer into this category. 
  • Re-naming the categories or describing the categories in a way that downplays the risks of investing.

Appropriateness

Our rules are not prescriptive about how the appropriateness assessment should be conducted and, as a result, firms had adopted a wide variety of different approaches. 

We’ve split our feedback into 2 sections: the design of the assessment; and the processes for consumers who fail assessments.  

Design of the assessment

The aim of the appropriateness assessment should be to prevent consumers investing in RMMIs where it would not be appropriate to do so. We found aspects of some firms’ assessments appeared to be designed to ensure consumers pass. This undermined the purpose of the assessment. 

We found some firms’ assessments used a significant proportion of binary questions, and others included clearly implausible answers in multiple choice questions. As a result, we felt these assessments would not adequately show the appropriateness of the product for their customers. 

In 1 example, 3 options were given in a true/true/false or yes/yes/no format where the correct answer was always the ‘odd one out’. In another example, the correct answer was always significantly longer than the incorrect alternatives. These patterns could guide consumers to the correct answer without them understanding the question. 

Most firms have produced assessments where consumers must answer all questions correctly to successfully complete the assessment. A small number of firms will allow consumers to answer one or more questions incorrectly and still consider them to be appropriate for the RMMI. Our rules do not specify a particular pass mark. However, when considering the requirements to pass the assessment, firms should consider whether there are any particular questions, or combinations of questions, where incorrect answers would suggest a fundamental misunderstanding of a key risk of the product. This will ensure that the consumer is not able to display a lack of knowledge of a key feature or risk of the RMMI and still be considered as appropriate to invest.  

Many of the assessments we have seen do not cover all relevant topics outlined in the relevant COBS 10 Annex, or are formed of randomly selected questions from a question bank where the selected questions may not cover all topics. We expect each iteration of the assessment to cover all relevant features of the RMMI products offered by the firm. 

The most robust assessments we have seen have either included fixed questions for each iteration of the assessment, or a question bank formed of multiple questions covering each topic with 1 question from each topic being selected at random for each iteration. Both options ensure that each iteration of the assessment covers all relevant topics and are created from different questions to previous iterations. 

Failing the assessment

Most firms have created question banks that allow for multiple assessments to be undertaken without the same questions being re-used, ensuring that they are compliant with COBS 4.12A.31R(3). However, we have seen that some firms will use the same questions on multiple assessments, usually with different answer options or answers appearing in a different order. 

Most firms are not providing any information to consumers on the outcome of the assessment other than whether they have passed or failed. Notifying the consumers of the general topics where they have shown a lack of knowledge or understanding will allow them to be able to research these areas should they still wish to consider investing. 

All of the firms who took part in the review have implemented a minimum 24-hour lock out for consumers who have failed 2 consecutive assessments, as required by COBS 4.12A.32R. Most firms have implemented longer lock outs for consumers who have failed multiple assessments. However, we also saw that multiple firms did not include a lock out of at least 24-hours after every failed assessment following the first 2 fails. These firms introduced a lock out after every 2 consecutive assessments instead. 

Some firms have limited the number of assessments a consumer can take before being permanently locked out and informed that the RMMI is likely not appropriate for them. For firms that allow consumers an unlimited number of attempts, we encourage them to consider whether there is a point at which repeated failures may provide evidence that the product is ultimately not appropriate for that consumer.  

Examples of good practice

  • Approaching the design of the assessment holistically with its overall purpose in mind – ensuring the assessment delivers a fair and objective outcome. 
  • Where the firm has altered the risk summary to be more suitable for the RMMI offered, the topics of these alterations are covered in the assessment.  
  • Where the firm has amended the risk summary to include specific features of the RMMIs offered by the firm, the appropriateness assessment includes questions that cover these features. 
  • Re-assessing consumers who registered with the firm before 1 February 2023 but have not yet invested in the RMMI. 
  • Giving consumers access to relevant resources to be able to research and understand the products and risks. 
  • Having a limit on the number of times a consumer can ultimately attempt the assessment before being told that the RMMI is likely to be inappropriate for them.

Examples of poor practice

  • Asking leading or simplistic questions that direct the consumer to the correct answer. 
  • Assessments do not cover all appropriate points outlined in the relevant COBS 10 Annex, or aspects of the RMMI that the firm has added to the risk summary. 
  • Where the assessment questions are selected randomly from a bank of questions, not ensuring that all relevant topics are covered in every iteration of the assessment. 
  • After two failed assessments not including at least a 24-hour cooling off period after every subsequent assessment. 
  • Where the assessment does not require all questions to be answered correctly, the consumer is able to incorrectly answer questions that fundamentally show that the RMMI as not appropriate for them, yet they are able to pass the assessment. 
  • The consumer is able to reasonably infer the correct answer to the question, see examples above. 
  • Firms do not have robust processes in place for consumers who contact the firm to request answers to the assessment questions or to circumvent any lock outs. 
  • Staff are inadequately trained to consistently and robustly review assessments where the firm must manually score them.

Next steps

We have given individual feedback to all the firms involved about the areas they need to improve. We expect firms offering RMMIs to retail clients to consider these examples and any changes they need to make to their practices to meet our expectations and improve consumer outcomes.