HM Treasury has released a consultation paper that would give the Financial Conduct Authority (FCA) powers to authorise the promotion of financial products.
Under current rules, an authorised firm can approve the marketing of an unauthorised company, but the Treasury said this framework “may not operate a strong enough safeguard to ensure such financial promotions are compliant with FCA rules that they are fair, clear and not misleading”.
Regulated firms don’t have to go through any specific process or assess the suitability and competence before approving the marketing of a non-regulated business, as the system now stands.
But this has proven very problematic.
Avoid future scandals
One example is the mini-bond scandal brought by the collapse of investment company London Capital & Finance (LCF).
LCF was regulated by the FCA and, as such, did not require approval for its promotional material.
Its marketing, however, was found to be misleading and the products advertised not suitable for retail investors.
The firm’s collapse caused over 11,600 individuals to lose around £237m ($299m, €261m).
This prompted the watchdog to first ban the promotion of speculative mini-bonds to retail investors for a year, later making the prohibition permanent.
“In order to strengthen the FCA’s ability to ensure the approval of financial promotions operates effectively, in this consultation the government proposes to establish a regulatory ‘gateway’, which a firm must pass through before it is able to approve the financial promotions of unauthorised firms,” the Treasury added.
“Any firm wishing to approve the financial promotions of unauthorised firms would first need to obtain the consent of the FCA.”
The government wants to hear from both industry and members of the public, especially retail investors, on how to structure and move forward with the newly-proposed regulatory powers.
The online ads problem
International Adviser revealed in December 2019 that the FCA was working with internet giant Google to tackle the advertisement of bogus investments to unsophisticated clients through the company’s search engine.
The regulator tried to counteract the fraudulent promotion with adverts of its own, but it was forced to pay for it itself, costing the watchdog nearly £90,000 in less than three months.
FCA chairman Charles Randell recently took a swing at Google and other social media companies in a speech, saying that “we need a framework to stop social media platforms and search engines from promoting unsuitable investments, including scams, to ordinary retail consumers”.
“It is frankly absurd that the FCA is paying hundreds of thousands of pounds to Google to warn consumers against investment advertisements from which Google is already receiving millions in revenue.”
