The Financial Conduct Authority’s Regulation of London Capital & Finance plc Contents

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5Financial promotions

161.A financial promotion is a communication that contains an invitation or inducement to engage in a financial product or service. Financial promotions are overseen by the Financial Promotions Regime (as set out in the Financial Services and Markets Act 2000), which seeks to ensure that customers are provided with clear and accurate information that enables them to take decisions that are appropriate for their individual circumstances.196

The ongoing government consultation on financial promotions

162.The Government launched a consultation on the “Regulatory Framework for Approval of Financial Promotions” in July 2020 in an attempt to address issues associated with the current regime. Currently, financial promotions by an unauthorised firm are required to be approved by an authorised firm (except for certain exemptions in the Financial Promotion Order 2005).197 However, as explained in more detail below, the approval of financial promotions is not itself a regulated activity. The consultation suggests that it has become increasingly evident that this approach is flawed, especially in instances where authorised firms fail to undertake adequate due diligence to ensure that approved promotions meet FCA requirements; and also where authorised firms approve financial promotions that relate to products which are beyond their sphere of expertise and which, as a result, fail to comply with FCA rules.198

163.Commenting on the legislative framework, Charles Randell CBE, Chair of the FCA, said “[…] The financial promotions order is also a huge issue: I think far more harm is accruing through the financial promotions order, and the exemptions from it, than has been recognised.”199

164.In its consultation, the Government says it is proposing a new regulatory gateway that would enable the FCA to provide more effective oversight, prevention and intervention, and require approver firms to have the relevant expertise and facilitate improved due diligence. The two options set out are:

• Option 1–Restrict approval of the financial promotions of unauthorised firms through the imposition of requirements by the FCA.
• Option 2–Specify the approval of financial promotions communicated by unauthorised persons as a ‘regulated activity’ under FSMA.200

165.Mr Randell set out to us the implications of the approval of promotions not being a regulated activity:

[…] approving financial promotions isn’t an activity we regulate. The way that FSMA is set up, under section 21 anyone who is authorised can approve financial promotions, but it is not a regulated activity. That means that we don’t get returns saying how many financial promotions have been approved, and we don’t get a regular supply of information from the firms who are doing this business […] So bringing this into the regime in the way that I have suggested will be a huge help […]201

Andrew Bailey, the former Chief Executive of the FCA, said in a letter to our Chair that “this makes the task of regulating promotions inevitably reactive and thus less robust […]”202

166.While we heard from witnesses the case for approving financial promotions communicated by unauthorised persons to become a regulated activity, the Government’s consultation points out a challenge with this policy option, noting that “[…] It would fundamentally alter the regulatory treatment of financial promotions [… It] is arguably a disproportionate way to address the government’s concerns and it could have unintended consequences for the regulation of financial promotions in general.”203

167.We welcome the Treasury’s ongoing consultation on approving financial promotions. We trust that the results of the consultation will be published swiftly and the conclusions implemented as soon as possible.

LCF financial promotions

168.In the case of LCF, Dame Elizabeth found that, despite the FCA’s financial promotions team raising concerns regarding LCF’s correspondence on a number of occasions, the breaches identified were not referred to supervision or enforcement for further review. She told us that:

Where, in relation in particular to financial promotions, we thought the trouble lay was that, although they had a repeated financial promotion breaches policy, it was not sufficiently robust. One of the real wickednesses was that LCF was frequently breaching the financial promotion rules, but nothing was done about it. If that information had been put together with other information, something might have been done much earlier.204

169.Andrew Bailey, former Chief Executive of the FCA, partly disagreed with this view. He told us that the financial promotions team “followed up pretty diligently” the alerts they got. “They got LCF to change its promotions, but the problem is that LCF did not stick to it, so we got this repeat cycle.”205 He added that the siloed nature of the [FCA] at the time contributed to this as it meant that LCF’s failure to change was not brought into the overall supervision of the firm.206

The FCA’s failure to use its powers on promotions

170.The FCA—under section 137S of the Financial Services and Markets Act 2000—is able to intervene in respect of breaches to financial promotions rules and can ban a promotion.207 The FCA also has rules which require financial promotions to be fair, clear and not misleading.208 However, in the case of LCF, the investigation found that the FCA did not have appropriate policies to allow it to intervene in LCF’s financial promotions breaches. Dame Elizabeth recommended that “the FCA should have appropriate policies in place which clearly state what steps should be taken or considered following repeat breaches by firms of the financial promotion rules.”209

171.Megan Butler, former Executive Director for Supervision (SIWS), and Jonathan Davidson, former Executive Director for Supervision (SRA), told us that the FCA had failed to use its powers to intervene in the case of LCF due to a risk-averse culture.210 Mr Davidson said that he pushed for the use of the power under section 137 of the Financial Services and Markets Act 2000 to be used on LCF in November 2018, as its use had been pushed back multiple times prior to his arrival.211

172.The FCA, in its response to Dame Elizabeth’s recommendation, said that it had changed its approach to financial promotions, and that in future it would review its policies and approaches to ensure that they are sufficient for serious infringements and multiple breaches of the financial promotions rules.212 The regulator has also introduced a “use it or lose it” programme where it is “committed to take action to remove permissions for regulated activities that are not being actively used and where the FCA consider out-of-date permissions may cause harm to consumers.213 The introduction of the programme should help prevent firms from using their FCA authorised status to promote unregulated activity.214 The FCA said that first tranche of firms are in the process of being contacted.215

173.We welcome the steps taken by the FCA to change its approach to financial promotions, as well as introducing the “use it or lose it” programme. In future, the FCA should be more interventionist and should make more frequent use of its powers rather than maintaining a culture of risk aversion.

Speculative illiquid securities mass-marketing ban

174.Partly in response to the LCF failings, the FCA introduced temporary product intervention measures from 1 January 2020 to 31 December 2020, in order to address risks of consumer harm from the promotion of speculative mini-bonds to retail investors, who did not understand the level of risks or potential financial losses involved. A particular concern for the regulator was around the mass-marketing of speculative illiquid securities.216 Following a consultation in June 2020,217 the FCA made a decision to make the speculative mini-bond mass-marketing ban permanent, with the new rules applying from 1 January 2021.218

175.The FCA recently published a discussion paper on strengthening financial promotions rules for high-risk investments. The regulator is seeking views on areas in which further changes could be made to protect consumers from harm.219

High net worth and sophisticated investor exemptions

176.The Financial Promotion Order includes an exemption for high net worth and sophisticated investors. The FCA said it was aware of unregulated companies, also known as introducers, which are separate from firms offering investments, coaching investors to self-certify as high-net worth or sophisticated so that the unregulated firm can assert their promotional activities are exempt from having to be approved.220 These exemptions have allowed unauthorised firms to issue financial promotions to high net worth and sophisticated investors without having to comply with the FCA rules including the “clear, fair and not misleading requirements.”221 Dame Elizabeth gave a similar view, telling us that:

There are a lot of problems around what I might call cowboys, who are not authorised at all, operating on websites and comparison websites. If you go on one, they are not necessarily obviously in breach of the financial promotions regulations, but when you get sucked into it you are asked to provide your details and then certify you are sophisticated and all these sorts of things.222

177.Nikhil Rathi, Chief Executive of the FCA, told us that as a result of the speculative illiquid securities mass-marketing ban “… what we are seeing is heavier use of the exemptions […] the high net worth exemption, the self-certification that you are sophisticated, and people being coached through to an online click to access those securities.”223

178.Commenting on the Treasury’s financial promotions consultation, John Glen MP, Economic Secretary to the Treasury told us that:

The issue is who is going to access what financial products. We have some challenges here with respect to getting that balance right while allowing high-net-worth and sophisticated investors who currently have certain criteria to be able to access certain products […] I am nervous about saying, “Only extremely wealthy people can access certain products”, but I am equally unhappy about a situation where there is an inherent vulnerability built into a lack of restraint […]224

179.The Financial Promotion Order would benefit from reform due to the increasing risks associated with the exemptions that allow customers to self-certify as high net worth or sophisticated.

180.The Treasury should—as a matter of priority—re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes need to be made to protect consumers.

Online platforms and the Online Safety Bill

181.Online platforms play a significant role in communicating financial promotions to consumers. The FCA told Dame Elizabeth about the practical difficulties of investigating unregulated, online sales channels which utilised search engines and social media for marketing purposes for example.225

182.The FCA told us that it is working closely with technology platforms such as Google226 to identify and help prevent harm to consumers online.227 In a letter to the Chair of the Committee, Nikhil Rathi stated that:

We provide alerts to Google once a week to enable them to remove Google Ads by firms which appear on our list. This work disrupts the actions of those behind the promotions and their ability to market to consumers, but the volume of new promotions being identified every week is high, so our focus is on challenging the online platforms to stop these promotions from being marketed in the first place to disrupt this flow.228

183.The Government published its draft Online Safety Bill on 12 May 2021. The Bill would seek to establish a new regulatory framework to tackle harmful content online.229 While the Bill makes provision to tackle harmful user-generated content such as romance scams and fake investment opportunities, it does not cover fraud via advertising, emails or cloned websites. Prior to the publication of the draft Bill, we heard from most of our witnesses on the importance of the Government bringing financial harm within the scope of the Bill.230

184.One of Dame Elizabeth’s recommendations is that “the Treasury and other relevant Government bodies should work with the FCA to ensure that the legislative framework enables the FCA to intervene promptly and effectively in the marketing and sale through technology platforms, and unregulated intermediaries, of speculative illiquid securities and similar retail products,” and that “serious consideration should be given to the coverage of financial harm in the proposed Online Harms Bill” [now the Online Safety Bill].231

185.Andrew Bailey told us that “In my time in the FCA, I argued with DCMS that the online harm legislation should include financial harm, and it has not.”232

186.Nikhil Rathi told us that the FCA had recommended to the Government that investment fraud should be included in the Online [Safety] Bill, and that the FCA “do not think that the other solution being mooted, around the online advertising programme, really matches the urgency of the problem that we are dealing with […]”233 Speaking further on the need for the inclusion of investor fraud in the Bill, he said:

At the moment, we have to negotiate voluntarily with every single [online platform] to see how far we can get them to move, change their policies and help us […] There is a lot of nefarious online activity going on out there, but this is a very big crime that is taking place in the UK every day and is costing people a lot of money. We think it deserves being in there, and we think it should not wait for an untested advertising programme that may come a few years down the line.234

187.When asked about his views on using the Bill to provide more consumer protection, John Glen MP, Economic Secretary to the Treasury, told us that:

[… Dame Elizabeth’s] report exposes the challenge that exists, with the fact that so many financial services products are marketed online. We are working very closely with DCMS on a separate piece of work around the online advertising programme […] Subsequently, with the Online Safety Bill, in pre-legislative scrutiny we will look at the issue of fraud and how that should fit into that, or not.235

[…]

If it is not, we will need to find another way of coming to deal with this really important challenge that we cannot let go by. That is why, in the meantime, in the advertising programme, we are having roundtables with the platforms, the tech companies and the Home Office, following conversations I have had with UK Finance, to get to grips with where responsibilities lie in this area. I have described where there are some gaps, and we need to come to terms with that.236

188.Aside from Dame Elizabeth and the FCA, a number of other organisations have called for the Government to consider including fake and fraudulent content that leads to scams in the Bill. About a week prior to the publication of the Government’s draft Bill, a coalition of 17 organisations including UK Finance and the City of London Police signed a letter to the Government outlining the need for the Online Safety Bill intervention. According to the letter, “ONS data shows there were 3.7 million incidents of fraud between March 2019 and March 2020, making it the crime that adults are most likely to fall victim to in the UK, while Action Fraud figures show £1.7 billion was lost to scams in the last year.”237

189.In a press release alongside the draft Bill, the Government said:

Fraud via advertising, emails or cloned websites will not be in scope because the Bill focuses on harm committed through user-generated content.

The Government is working closely with industry, regulators and consumer groups to consider additional legislative and non-legislative solutions. The Home Office will publish a Fraud Action Plan after the 2021 spending review and the Department for Digital, Culture, Media and Sport will consult on online advertising, including the role it can play in enabling online fraud, later this year.238

190.It is very disappointing to see that despite the numerous representations made to the Government, measures to address fraud via online advertising have not been included in the draft Online Safety Bill. This is a missed opportunity to act and potentially help prevent another LCF-type event. The increasing frequency of fraudulent activity online that leads to scams and financial harm is alarming, and the Government must intervene as a matter of urgency.

191.We note the Government’s intention to consider additional legislative and non-legislative solutions to tackle fraud via advertising, emails or cloned websites, including the online advertising programme, but we believe quicker action is required to protect consumers and help the FCA address the issue adequately.

192.We recommend that the Government should include measures to address fraud via online advertising in the Online Safety Bill, in the interests of preventing further harm to customers being offered fraudulent financial products.

193.Pending any legislative changes, the FCA should continue to work with online platforms such as Google to remove misleading and fraudulent adverts as quickly as possible, to protect customers from scams.

194.We expect to revisit this subject as part of our inquiry into Economic Crime.