Peter Parry, ShareSoc member and former Policy Director at the UK Shareholders Association writes about the joint submission by the UK Shareholders Association and ShareSoc to the HM Treasury consultation ‘Regulatory Framework for Approval of Financial Promotions’
Financial promotions – a case study in how not to delegate.
The Consultation
Another day and another consultation lands in the inbox. This one’s from HM Treasury – titled ‘Regulatory Framework for Approval of Financial Promotions’. Sounds boring? Maybe, but the issue under review is actually a little more nuanced and intriguing than the title suggests. ‘It is the use of financial promotions by unauthorised firms that is the focus of this consultation,’ opines the Treasury missive.
Reading on, our eyes almost popped out with incredulity. Apparently, when an unauthorised person or firm (i.e. one that is not authorised by the FCA) wants to promote a service or product it must get the promotion approved by an authorised firm. So far so good; it all sounds reasonable as a system of delegation, doesn’t it…? Not so fast! What it is actually saying is that, under the current system of approvals, any authorised firm can approve any financial promotion for any unauthorised person or firm. In theory, the authorised firms are supposed to have some knowledge or expertise to be able to assess the product being promoted but in practice this isn’t checked or monitored.
Failures
The Treasury document goes on to say, somewhat coyly, that ‘The FCA has identified a number of cases of authorised firms failing to satisfy its requirements in approving the financial promotions of unauthorised persons’. It adds that, ‘This includes cases in which the approving firm has failed to undertake adequate due diligence to ensure promotions it has approved meet FCA requirements and instances of firms approving financial promotions which relate to products which are beyond their sphere of expertise and which, as a result, fail to comply with FCA rules’.
To summarise, in practice the rules surrounding approval of financial promotions by unauthorised firms are so lax that it doesn’t really matter whether the authorised firm has the competence (in terms of understanding of the product) to do this. Nor, it seems, are there any specific due diligence requirements that the approvers have to undertake (for example, checking the soundness of claims about likely returns).
Impact on Consumers
Now you might think that this was bad enough but it gets worse. There is very unlikely to be any redress for the consumer when it all goes wrong – because the promoter is unauthorised. So, there is almost no prospect of compensation from the Financial Services Compensation Scheme (FSCS). There is no system of redress or claim against the approver of the promotion and it seems that in most cases, because the provider is unauthorised, the regulator (the FCA) is also likely to wash its hands of the matter.
Conflicts
Could there possibly be anything else that marks this system out as truly awful? Well actually, yes. The authorised firms doing the ‘approving’ can charge for their services. That may sound fair enough but it creates a situation in which authorised firms that are so minded can generate extra revenue for themselves by providing superficial, few-questions-asked approvals. Once word gets round who these firms are, any unauthorised provider knows where to go for a sure-fire approval of their promotions, no matter how dubious the promotional material is. All sounds far-fetched…? Well, London Capital and Finance (LCF) which collapsed in January 2019 owing 11,500 retail investors £236 million was an authorised firm. It was busy promoting mini-bonds which claimed to offer an 8% return which the FCA decided was misleading. It is not clear whether LCF was involved in signing off promotions for unauthorised firms – but you can understand the concern.
As a backdrop to all this, remember that we are talking about financial promotions by unauthorised firms. A brief discussion with an authorised IFA suggested that the process for becoming authorised by the FCA is not so very onerous or difficult. One has to wonder why it is, therefore, that firms would choose to remain unauthorised.
Proposals
So what steps is the Treasury proposing to take to tighten up this woeful system? Not a lot really. The suggestion is that a ‘gateway’ system should be introduced. Two variations of this are suggested:
- Option 1, the Treasury’s preferred option, involves withdrawing the authority for all authorised firms to carry out approvals for their unauthorised brethren and making all those that want to do approvals in future apply to the FCA for formal permission to do so. The FCA would vet the suitability of the firms to do approvals and then give consent. As the Treasury document helpfully suggests, ‘Consent could be linked to products or services within the firm’s area of expertise.’ As one might have thought this a basic prerequisite it is intriguing to wonder what other options might be in the frame.
- Option 2, is essentially the same as Option 1 except that it would involve amending the Regulated Activities Order to make the approval of financial promotions of unauthorised persons a regulated activity.
The proposals are silent on how the records of competence will be kept up to date. People with a given expertise may leave an employer and move on – as our ‘tame’ IFA has just done (hence his knowledge of the FCA authorisation process). And what of new and innovative products needing approval? How will the FCA keep tabs on whether existing approvers need an additional authority to approve these?
Our response
We have responded to the Treasury suggesting that Option 2 is the very least that it and the FCA should be considering. In addition we have also suggested that:
- The FCA should require all authorised firms that are given consent to do approvals for financial promotions to submit a report each year to the FCA listing the approval requests received and carried out;
- The FCA should carry out a spot check on a meaningful number of approvals each year to monitor the effectiveness of the process and to check the quality of the promotional material being approved. The FRC carries out quality checks on a sample of company reports and audits. The FCA should easily be able to do a quality check on financial promotions.
- The FCA should publish the findings of its annual review – as the FRC does with its quality monitoring.
The consultation closed on 25th October. We’ll wait to see what the Treasury and the FCA come up with – although we are not holding our breath.
Peter Parry – 25.10.20
Our full response is here Treasury Consultation Regulatory Framework for Approval of Financial Promotions
and the FCA consultation document is here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902101/Financial_Promotions_Unauthorised_Firms_Consultation.pdf
I do not think that authorised firms should be permitted to approve any unauthorised firm or product.
Any breach of the rules should then be dealt with very harshly, with personal liability falling upon those controlling the authorised firm (and, if necessary, their families or other proxies or subsidiaries) for 100% of any fines and losses resulting.
No unauthorised firms or products should be permitted to advertise or seek approval for themselves or their products other than via FCA authorisation, again with harsh sanctions on transgressors as above.
No non-UK firm should be permitted to obtain authorisation without depositing a sufficiently large security bond to cover (as far as possible) potential losses from failure, delisting or malpractice.
The FCA should be far more rigorous in its approval, monitoring and vetting than it is.
It needs to be regarded by all as a savage tiger with sharp teeth poised to attack any transgression, not as a bleary-eyed soft touch.