FCA: it is important for platforms like Google to be legally liable for financial promotions they pass on
An online publisher would have to ensure that any financial promotion which they communicate has first been approved by an authorised person.
The UK Financial Conduct Authority (FCA) today posted its latest Perimeter Report which updates on a number of regulatory issues, including the mass-marketing of high risk investments to retail consumers.
Where the issuer of a high-risk investment is unregulated, the FCA’s ability to regulate the sale of the investment generally rests on the involvement of an authorised person distributing the product or approving the financial promotion to market it.
The Government is consulting on measures to strengthen the FCA’s ability to ensure the approval of financial promotions operates effectively. The Government is proposing to establish a regulatory ‘gateway’, which a firm must pass through before it is able to approve the financial promotions of unauthorised persons. This would mean that any firm wishing to approve such a financial promotion would first need to obtain the consent of the FCA. This would apply to any third party financial promotion approved by an authorised person, but the regulator expects it to be particularly relevant in the context of promotions for high-risk investments.
Unauthorised firms are currently able to rely on exemptions in the Financial Promotion Order to communicate financial promotions to high net worth and sophisticated investors (subject to certain conditions) without needing to involve an authorised firm, and without being subject to the FCA Handbook rules.
These exemptions have been a well-established feature of the regulatory framework for some time. They allow companies to promote investments to high-net worth and sophisticated retail investors without needing to be FCA-authorised, with the associated costs, or having to take their financial promotions to an FCA-authorised firm for approval.
To self-certify as a ‘sophisticated’ retail investor, a consumer must confirm that one or more of a list of circumstances applies to them. One of these is that the consumer has made more than one investment in an unlisted company in the last two years. In the past, this would have required some private business experience. However, since the advent of investment-based crowdfunding and peer-to-peer platforms, access to these types of investments has become relatively straightforward.
There is also an exemption for promotions to ‘high net worth’ retail investors.
However, the current definition of ‘high net worth’ is investors who have an annual income of £100,000 or more, or more than £250,000 net assets. These levels have remained unchanged for the last two decades, although the value of money has declined significantly in that period.
The FCA has also seen evidence of firms abusing these exemptions by ‘coaching’ people through them. Investors who do not, in practice, meet the tests set in legislation are being ‘pushed’ through them, often by unregulated firms. This behaviour is sometimes helped by the appeal to some retail investors of self-certifying themselves as ‘sophisticated’ or ‘high net worth’ and the sense of exclusivity that the exemptions provide.
The financial promotion restriction and related exemptions are contained in legislation, and are a matter for the Government. In its consultation on the ‘Regulatory Framework for Approval of Financial Promotions’, the Government noted that it continues to keep the legislative framework underpinning the regulation of financial promotions under review, including the effectiveness of the exemptions that currently form part of the regime.
Online platforms, such as search engines and social media platforms, play an increasingly significant role in communicating financial promotions to consumers, the FCA notes. As a result, consumers are being more readily exposed to adverts, ranging from scams and promotions of high-risk investments to false or misleading adverts (falling either side of the regulatory perimeter) which, directly or indirectly, lead consumers onto paths resulting in harm. As the digital world continues to develop, the potential harms to consumers change in both nature and severity.
“We think that it is important that online platform operators, like Google, bear clear legal liability for the financial promotions they pass on – at least to the same extent as traditional publishers of financial promotions; that would mean that an online publisher would have to ensure that any financial promotion which they communicate has first been approved by an authorised person or otherwise falls within the scope of an exemption in the Financial Promotions Order”, the FCA says.
The regulator is currently considering with the Treasury the application of the financial promotions regime to these platform operators and whether the FCA needs any new powers over them. This work is relevant not just to the promotion of high risk investments but to the FCA’s work to address online harms – including scams – more generally.
“We believe there is a strong case to include fraud within the Online Harms legislation, given the FCA’s limited power to take down advertising by those seeking to scam people via the internet”, the regulator says.
The FCA notes that it is seeing a large number of adverts online that it thinks are not appropriate, such as search engine results. If the regulator wants to have them taken down, it has to convince the online company that the adverts are illegal on a case-by-case basis. In practice, this takes time and can have limited effect as online adverts can re-appear, in a slightly different form, soon after the original advert is removed.
The FCA has recently launched a Call for Input on Consumer Investments, which asks respondents for feedback on these and other issues relevant to this market.
