The balance between producing good marketing and achieving compliance has always been a tricky one. 

    Get it right and you reap the rewards. Get it wrong and it’s a whole different matter, potentially leading to regulatory intervention and even reputational harm to your firm.

    While financial promotions can initially seem complicated, there are ways to reduce the regulatory risks associated with marketing your services.

    Here we’ll set out the regulation and legislation that governs financial services promotions, and explain the impact of the product governance rules (PROD) and senior managers and certification regime (SM&CR).

    How financial promotions are regulated

    Promotions about financial services are regulated by the FCA, though there is some overlap with other regulatory bodies such as the Advertising Standards Agency (ASA) and the Office of Communications (Ofcom). 

    Both of these regulators complement the work of the FCA in terms of the elements of a financial promotion not generally covered under financial services legislation.

    Ofcom and the ASA tend to be reactive regulators, in that they respond to complaints about promotions, but the FCA is both reactive and proactive.

    The FCA has a special team dedicated to financial promotions and they actively review promotional content such as websites and newspaper articles for potential issues. 

    They also investigate reports about promotions that are potentially misleading, unfair or unclear. If you want to report such a promotion, you can can do so via the FCA website here.

    What's classed as a financial promotion?

    The FCA defines a financial promotion as “an invitation or inducement to engage in investment activity”.

    Financial promotions can take many forms, including:

    • Newspaper adverts
    • Radio commercials
    • Leaflet drops
    • Brochures and guides
    • Presentations
    • Social media advertising
    • Window displays
    • Direct offer promotions.

    Direct offer promotions are defined as the recipient being given sufficient information to make an informed decision about whether or not to take up the offer, and having the means to apply for the product or service being offered.  Direct offer sales are potentially high risk and are not suitable for all products or clients.

    Financial promotions can be delivered in ‘real’ time or ‘non-real’ time. 

    Real time financial promotions are those which take place during a personal visit, telephone conversation or other interactive dialogue, such as a web chat or seminar.

    A non-real time financial promotion is one that is not ‘interactive’, for example a newspaper article.

    Understanding section 21

    When getting to grips with financial promotions, it’s also worth flagging section 21 of the Financial Services and Markets Act.

    This contains a restriction on the communication of financial promotions. It makes clear that a firm must only issue a promotion if it is authorised, if the content of the promotion has been approved by an authorised firm or if the promotion is deemed to be ‘exempt’ from the rules.

    Most firms reading this will be FCA-authorised firms and therefore perfectly ok to issue financial promotions.

    However, authorised firms may be approached by third parties such as introducers who aren’t FCA-authorised but wish to communicate a financial promotion to clients. 

    Such a firm is prohibited from doing so without the promotion being approved by an authorised firm (that is, you). This is known as a section 21 approval. 

    Providing this approval is a risk for an authorised firm, and the FCA has recently reiterated its expectations in this area. 

    In particular, it has highlighted the level of due diligence needed on the financial promotion to ensure it meets the overarching requirement to be fair, clear and not misleading.

    Firms should consider the risks associated with any request for a section 21 approval carefully, as it’s you who will be the one accountable to the FCA, not the third party.

    Some promotions are exempt from the specific financial promotions rules, such as ‘awareness’ type promotions that simply provide the name of the firm and a brief, factual description of the firm’s activities. 

    However, we would always suggest firms should still follow their financial promotion procedures when putting together an ‘awareness’ type promotion.

    The impact of PROD and SM&CR

    The PROD rules aim to improve a firm’s oversight and governance processes, and its systems and controls for the design, approval, marketing and managing of a product throughout its life cycle.

    In the case of financial promotions, this means firms should have adequate governance and oversight to ensure they understand the products and services being promoted and that they are only marketed to the appropriate target audience. 

    PROD is a bit of a buzz word at the moment, but the expectation to know the product/service you are marketing and ensure the target audience is appropriate isn’t new. This requirement has been around for a long time - the PROD rules merely reinforce that expectation. 

    Aside from compliance, targeting the appropriate audience is common sense anyway.  After all, marketing is likely to be more effective when directed at the right people.

    The other set of rules that impacts financial promotions is the SM&CR.

    As part of this, firms will need to ensure every senior manager has a statement of responsibilities (SoR). As it says on the tin, this needs to clearly set out the senior manager’s role and responsibilities.

    A senior manager will need to take responsibility, and be accountable for, the firm’s financial promotions and this responsibility needs to be included in the individual’s SoR.

    You can access our free SM&CR guide here.

    Requirements for financial promotions

    The FCA’s rules on financial promotions are spread across various FCA handbooks, depending on the type of business being promoted.

    The overarching requirement is for the promotion to be fair, clear and not misleading. It’s worth remembering the FCA is an outcomes-based regulator, whose rules and guidance provide a framework to achieve the right outcomes. 

    This means compliance with specific rules may not result in compliance overall. Firms need to take care they don’t fall into a tick box type approach to their financial promotions.

    Here’s a quick checklist of what to consider and the systems and controls needed when it comes to financial promotions:

    • Senior management responsibility - This must be a suitably qualified or knowledgeable person with appropriate expertise, in terms of both the product or service and the regulatory requirements
    • Due diligence in terms of the product or service
    • Details of products that either can’t be marketed generally or can only be marketed to certain client types
    • Identifying the intended target audience for the product or service
    • Approval of financial promotions (including those of any appointed representatives, as they are not permitted to approve their own promotions)
    • Review, expiry or reapproval of financial promotions to ensure continued compliance
    • The management information required and how it is used
    • Record keeping for each financial promotion approved

    Hopefully this helps cement your understanding around the financial promotions rules, and helps you reduce any associated potential risks.

    Start the discussion

    Add a comment