In our previous client alert, we mentioned the need for
managers to review new rules contained in PS22/10, published by the UK Financial Conduct
Authority (FCA).
The rules governing the main risk warnings for financial promotions
of high-risk investments will have effect from 1 December
2022.
FCA-authorised managers and distributors/placement agents who wish
to promote funds, including non-UK funds to investors who would
otherwise be classified as retail investors, will need to ensure
that materials, such as private placement memoranda and other
promotional communications, include the prescribed risk warning and
risk summary. These are discussed below.
The other provisions and the bulk of the new rules, together with a
statement of the existing rules in the COBS 4.12 chapter of the FCA
Handbook (which will be repealed in their entirety with new rules),
the most relevant of which will be those in the new COBS 4.12B,
will take effect starting 1 February 2023.
These will include rules, some of which are the same as those that currently apply, on:
- The preliminary assessment of suitability
- Personalised risk warnings and "cooling off periods"
- Restrictions on monetary and non-monetary benefits
- Providing risk warnings
We intend to cover the remaining rules in an alert closer to the time that they come into force.
HOW THE RULES APPLY TO PRIVATE FUNDS?
The PS22/10 rules identify Non-Mass Market Investment (NMMI) as
a category of high-risk investment will take effect starting.
Non-Mainstream Pooled Investments (NMPI), the promotion of which
are currently governed by the rules in the COBS 4.12 chapter of the
FCA Handbook, are included as a type of NMMI.
PS22/10 expressly confirms that a unit in an unregulated collective
investment scheme and a unit in a qualified investor scheme, as
well interests in long terms asset funds, are NMPIs; the rules
should, therefore, apply to all private funds unless they are
marketed as UCITS funds.
RESTATING THE STARTING POINT: THE RETAIL CLIENT RESTRICTION
The starting point in the current rules restate (and from 1
February, the new COBS 4.12B will replace but restate the current
COBS 4.12 wording) the restriction on promoting an NMPI: a firm,
such as a manager or distributor/placement agent, must not
communicate or approve a financial promotion that relates to an
NMPI where that financial promotion is addressed to, or
disseminated in such a way that it is likely to be received by, a
retail client.
The rules qualify this restriction stating, in effect, that if an
investor falls within a category identified in the rules, the firm
may promote the NMPI to that investor. The restriction does not
apply to units in unregulated collective investment schemes, which
are subject to a statutory restriction on promotion in section 238
of the Financial Services and Markets Act 2000. Together, with
eight other categories of investor, the list includes (and from 1
February will continue to include):
- Certified high-net-worth-investors
- Certified sophisticated investors
- Self-certified sophisticated investors
It is in promotions made to these types of investors that the risk warning and risk summary will need to appear.
THE RISK WARNING AND RISK SUMMARY
The rules require a risk warning in the following terms (the
first sentence only where the warning would otherwise exceed the
number of characters permitted by a third-party marketing
provider):
"Don't invest unless you're prepared to lose
all the money you invest. This is a high-risk investment and you
are unlikely to be protected if something goes
wrong."
The rules require the risk warning, when communicated in a digital
medium, to have a link in the form of text stating
"Take 2 mins to learn more" which, when
activated, delivers the risk summary in the Annex to the rules.
Where the promotion is not made digitally, the risk summary must be
provided in a durable medium (e.g., as part of a private placement
memorandum or promotional document that accompanies the
memorandum).
The risk summary must be in the form prescribed in the Annex to the
rules, unless the firm has grounds identified in the rules for
departing from that form and also comply with rules as to its
presentation (e.g., the requirement that the summary be prominently
brought to the retail client's attention, taking into account
the content, size and orientation of the financial promotion as a
whole). The prescribed form covers the following:
- The key risks, described under the headings:
- You could lose all the money you invest
- You are unlikely to be protected if something goes wrong
- You are unlikely to get your money back quickly
- This is a complex investment
- Don't put all your eggs in one basket
- A statement directing investors to the FCA's website
The rules also require that the warnings are: (a) prominent,
taking into account the content, size and orientation of the
financial promotion as a whole; (b) except where the risk warning
cannot be provided in writing, clearly legible, contained within
its own border and with bold and underlined text. For website
communications, the warnings must: (a) be statically fixed and
visible at the top of the screen, below anything else that also
stays static, even when the user scrolls up or down the webpage;
and (b) be included as described in (i) on each linked webpage on
the website or page on the application relating to the NMPI (i.e.,
fund, in question).
The rules prohibit any promotion from containing any design feature
that has the intent or effect of reducing the visibility or
prominence of a risk warning or risk summary. They also prohibit
any promotion from containing any design feature which has the
intent or effect of reducing the visibility or prominence of the
risk summary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.