Financial Promotions And Other Communications With Customers, Including Information About The Firm Flashcards
What is a financial promotion?
- Invitation or inducement that aims to persuade the recipient to engage in investment activities
- Can only communicate financial promotion if you are financial promotions have been authorised by the FCA (unless there’s some exemptions)
- Financial promotion is not restricted in terms of the media of communication. The rules apply to online advertising, printed advertising, emails, phone calls, radio etc
Under Section 21 of FSMA - what is the definition of investment activity?
- Entering into or offering to enter into an agreement where either party is involved in a controlled activity (i.e., a regulated financial service).
- Using rights linked to a controlled investment to:
A. Buy or sell investments,
B. Underwrite (take on financial risk for) investments, or
C. Convert one type of investment into another.
General note: if an activity involves regulated financial services or investments, it falls under the scope of investment activity under FSMA Section 21.
Promotion of controlled activities and controlled investments is prescribed under schedule 1 of FSMA 2000 (Financial Promotion) Order Act 2005 (FPO).
What products are they referring to with regards to invitations and inducements under this act?
- Stakeholder pensions.
- Personal pensions.
- Investments -
A. Bonds or gilts
B. Shares or stock in a company.
C. Units in collective investment schemes.
D. Endowment plans.
E. Options, futures and contracts for differences
F. Individual savings accounts.
G. Stakeholder and non-stakeholder investment child trust funds.
H. Funeral plan contracts. - Cash savings and bank accounts.
- Insurance -
A. Household and motor.
B. Travel.
C. Payment protection or critical illness.
D. Private medical insurance
E. Extended warranties
F. Mortgages and other home finance products.
Under FSMA section 21 - an unauthorised person may not communicate a financial promotion in the UK unless either:
What is the exception criteria for promotion?
- Contents are approved for the purposes of section 21 by an authorised person.
- All authorised persons that want to approve financial promotions for unauthorised persons need permission from the FCA.
- They are subject to an exemption under the FPO.
An unauthorised person may not communicate a financial promotion in the UK in the course of business unless, they are subject to an exemption under the Financial Promotion Order - FPO.
The exemptions under the FPO are split into three categories.
What are these?
- Exemptions applicable to all controlled activities. (Part IV of the Order) -
A. Apply broadly to all types of financial promotions, regardless of the specific financial product/ service involved. - Exemptions applicable only to control activities concerning deposits and contracts of insurance other than life policies. (Part V of the Order) -
A. Apply only to financial promotions related to bank deposits and insurance contracts, except for life insurance policies - Exemptions applicable to any other types of controlled activities. (Part VI of the Order) -
A. Covers all other financial promotions that don’t fall under the first two categories, meaning they apply to specific types of investments and financial services
The first exemption under the FPO is - Exemptions applicable to all controlled activities. (Part IV of the Order). This means some financial promotions are allowed even if the person making them is not authorised.
What are the specific exemptions in this first point?
- Financial promotions to overseas recipients - promotion is exempt if it’s:
A. Made a person who receives it outside the UK, or,
B. Directed at persons who are outside the UK. - Follow-up financial promotions.
A. Promotion is a follow-up to a previous exempt promotion, it is also exempt.
B. Original promotion must either have:
I. been exempt or,
II. contained specific required information. - Introductions -
A. Financial promotion that’s made by a person who introduces someone to an authorised firm without breaking the rules.
B. Exemption applies if the introduction is made to help the recipient connect with certain financial professionals. - Exempt persons -
A. Someone already exempt under other FCA rules can also make financial promotions.
B. They don’t need extra permission to promote their exempt activities. - Generic promotions -
A. Financial promotion is allowed if it does not mention:
I. A specific controlled investment from a named provider.
II. Name of a person or firm involved in a controlled activity.
B. Promotion should be broad.
C. General financial information can be shared without breaking the rules. - Investment professionals -
A. Financial promotions made to certain professional investors who understand the risks involved.
B. Exemption applies only if the promotion is directed exclusively at these qualified individuals. - Journalists -
A. Can publish financial content without authorisation and are exempt if it’s in a:
I. Newspaper, magazine, or journal.
II. News website or information service that updates regularly.
III. TV or radio broadcast.
B. However, the publication cannot give direct investment advice or help people buy/sell specific investments.
The third exemption under the FPO is - Exemptions applicable to any other types of controlled activities. (Part VI of the Order) .
What are the specific exemptions in this third point?
- Certified high net worth individuals.
- Sophisticated investors.
The financial promotion rules in Principle 7 (PRIN) and COBS for communications with regard to fair, clear and non-misleading communications DO NOT APPLY in two kinds of scenarios.
What are these?
- Excluded Communications
A. E.g. : A one-off promotion that is not a cold call.
B. Applies to specific correspondence sent to one customer/ small group, with the expectation that they are jointly engaged in an investment activity.
C. It’s a one-time, targeted communication, it does not have to follow the usual financial promotion rules. - Financial Promotions to Investment Professionals or Eligible Counterparties -
A. Financial promotions sent to investment professionals (e.g. hedge fund manager) / eligible counterparties - not subject to the fair, clear, and non-misleading rule.
B. If the promotion relates to a designated investment business and is sent to a professional client (high net worth individual) - must follow the fair, clear, and non-misleading principle.
Briefly explain what investment professionals are under the FPO and, who they include?
- Individuals or firms that work in the financial industry and have deep expertise.
- They include:
I. FCA-authorised firms (e.g., investment banks, asset managers).
II. Government institutions (e.g., central banks).
III. Large institutional investors (e.g., pension funds, insurance companies). - Financial promotions sent to them DO NOT have to follow the fair, clear, and non-misleading rule.
Briefly explain what professional clients are under MiFID II and COBS and, who they include
- Clients who have some financial expertise, but they are not necessarily investment professionals.
- They include:
A. Companies meeting size criteria (e.g., €20M balance sheet, €40M turnover, or €2M own funds).
B. High-net-worth individuals (HNWIs) who opt-in to be treated as professionals.
C. Local public authorities (with sufficient experience in investments). - Financial promotions sent to a professional client regarding a designated investment business - MUST be fair, clear, and not misleading.
In order to achieve compliance with the PRIN (principle 7) and COBS for communication -
What should the firm ensure when making a financial promotion to clients?
- Clearly State Capital at Risk
A. If the product/ service could lead to capital loss - MAKE IT CLEAR to the client. - Provide a Balanced Yield Figure
A. If a yield (return) is quoted, it should NOT BE MISLEADING.
B. Should reflect both short-term and long-term prospects. - Explain Complex Charges Clearly
A. If an investment or service has a complicated fee structure - promotion should CLEARLY EXPLAIN it.
B. Also consider what the client needs to understand. - Names the FCA as its regulator.
- Accurately Represent Third-Party Products
A. A firm promoting a packaged product/ stakeholder product (pension or ISA) that it DID NOT CREATE - MUST give fair and not misleading impression of the product’s producer or manager.
When a firm provides information to retail clients (excluding excluded communications and image advertising) -
What should it ensure?
- Include the name of the firm
- Accurate and gives fair and prominent indications of any relevant risks when referencing any potential benefits.
- Is sufficient and presented in a way that an average person in the target group can easily understand
- Does not disguise, diminish or obscure important items, statements or warnings.
- The font size of risk warnings must be at least as big as the main text.
- The layout of the information should ensure the risk warnings are clearly visible.
- All information and marketing materials should be in the same language, unless the client has agreed to receive information in multiple languages.
- Information is up-to-date and relevant to the means of communication used.
One of Pham communicates with clients, comparisons can be made in the information delivered to the client.
What must the firm ensure whilst making these comparisons?
- Must be fair and meaningful
- Should be presented in a fair balanced way.
- In relation to MiFID or equivalent that party country business - sources/. information used for comparison must be specified.
- Key facts and assumptions used to make the comparison should also be included.
- If information refers to a particular tax treatment - the firm must specify that this treatment depends on the individual circumstances. (Varies on a case by case basis)
What conditions should a firm’s communication to retail clients satisfy where information contains an indication of past performance of a relevant investment or financial index?
- Past performance should not be the main focus –
A. Cannot be the most prominent part of the message. - Information must cover a sufficient time period –
A. Include performance data for at least the last five years.
B. If the investment is < five years, then the data must cover its entire history. - Performance data must be complete – A. Figures should be based on full 12-month periods
- Currency effects must be disclosed –
A. If performance figures are in a different currency than the retail client’s home country (EEA state), this must be clearly stated.
B. Warning should also be included, explaining that returns can go up or down due to currency fluctuations. - Costs and fees must be transparent –
A. If figures show gross performance (before costs) - all applicable commissions, fees, and charges must be disclosed.
What conditions should a firm‘s communication to retail clients satisfy where the information includes or refers to simulated past performance of a financial instrument or index?
- Simulation must be based on real past data –
A. The simulated past performance must be derived from the actual past performance of one or more financial instruments or indices.
B. These are the same or very similar to the one being discussed. - Must follow key conditions for real past performance –
A. Past performance cannot be the most prominent feature.
B. Data must cover at least five years (or the full available period).
C. Performance figures must be based on complete 12-month periods.
D. Currency differences must be disclosed with a warning about fluctuations.
E. If showing gross performance, all relevant fees and charges must be disclosed. - A clear warning must be included –
A. Communication must prominently state that the figures represent simulated past performance.
B. Should say that the past performance is not a reliable indicator of future performance.
The financial promotion rules contain detailed authorisation and record-keeping requirements for financial promotions involving non-mainstream pooled investments.
What are the rules around record-keeping?
- The firm have an adequate record of any financial promotion of communicates and approves.
- The record must be retained:
A. Indefinitely for a pension transfer, opt-out or FSAVC
B. Six years for a life policy, occupational pension scheme, small self-administrated scheme, personal pension or stakeholder pension
C. Five years for MiFID or equivalent, third country business
D. Three years for other cases.
What is some general information that the firm must provide to a client when communicating to them?
- Contact details of the firm.
- Methods of communication to be used between the firm and the client.
- A statement of the fact that the firm is authorised and the name of the competent authority that has authorised the firm.
- If a firm is acting through an appointed representative, a statement of this fact.
- The nature, frequency and timing of the reports on the performance of the service to be provided by the firm to the client.
- Conflict of interest policy of the firm.
When a firm proposes to manage investments for a client - what information must the firm provide to the client?
- How the portfolio will be evaluated –
A. Explain the method and frequency of evaluating the investments in the client’s portfolio.
2 Delegation of management –
A. If the firm delegates discretionary management of any part of the portfolio to another party, this must be clearly disclosed.
- Performance benchmark –
A. Specify any benchmark that will be used to compare the performance of the client’s portfolio. - Types of investments and transactions – A. Types of investments that may be included in the portfolio.
B. Types of transactions that may be carried out.
C. Limits or restrictions on those investments and transactions. - Management objectives and risk levels – A. Investment objectives of the portfolio.
B. Level of risk that will guide investment decisions.
C. Specific constraints on the firm’s discretion when managing the portfolio.
