FCA: Strengthening financial promotion rules for high-risk investments and firms approving financial promotions – DP21/1
On April 29, 2021 the Financial Conduct Authority (FCA) published a Discussion Paper which sets out proposals to strengthen its financial promotion rules for high-risk investments to help retail investors make more effective decisions. This follows concerns about a growing trend of retail investors choosing to invest in inappropriate high-risk investments that do not meet their savings goals and investment needs. This can lead to significant and unexpected investment losses.
The Discussion Paper focuses on three main areas where the FCA intends to strengthen its financial promotion rules to help investors make more effective decisions that meet their savings and investment needs:
- The FCA’s classification of high risk investments (chapter 3): The FCA classification determines the level of marketing restrictions that apply to an investment. The FCA wants to ensure that it captures all investments that pose the highest risk to consumers and that investments with similar characteristics are treated in a similar way to prevent arbitrage. As a result, the FCA asks whether there are any investments which are not subject to marketing restrictions which should be, as well as for views on potential changes to the current classification of certain types of investments and consequently the level of marketing restrictions that apply to them. For example, to prevent opportunities for arbitrage in the context of the FCA’s rules for speculative illiquid securities and potential changes to the definition of readily realisable securities for the purposes of the financial promotion rules.
- Further segmenting the high risks investments market (chapter 4): The FCA is concerned that despite the existing marketing restrictions, too many consumers are still investing in inappropriate high risk investments which do not meet their needs. The FCA plans to strengthen its rules to further segment high risk investments from the mainstream market and seeks views on certain aspects of this. For example, what can be reasonably done to strengthen the investor categorisation process where access to a financial promotion is restricted to certain types of investor? What are the most effective improvements the FCA can make to risk warnings? Suggestions in the Discussion Paper include requiring consumers to watch educational videos or to pass an online test to demonstrate sufficient knowledge about financial products so as to help prevent consumers from simply clicking through and accessing high-risk investments that they do not understand.
- The approval of financial promotions (chapter 5): Firms which approve financial promotions for unauthorised persons play a key role in ensuring those promotions meet the standards the FCA expects. The FCA is seeking views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.
The FCA is inviting feedback on its Discussion Paper by July 1, 2021. It will consider the feedback received alongside further analysis and testing, and intends to consult on rule changes later in 2021.
(FCA, Strengthening financial promotion rules for high-risk investments and firms approving financial promotions – DP21/1, 29.04.2021)
Kalifa Review of UK Fintech – Government response
On April 26, 2021, the Chancellor of the Exchequer issued a Written Statement setting out the Government’s response to the independent review of the UK FinTech sector that the Chancellor asked Ron Kalifa to conduct at Budget 2020.
The Kalifa Review was published on February 26, 2021 and it makes a number of recommendations aimed at Government, regulators, and industry. The Written Statement sets out the actions that Government and regulators are taking in response to the Kalifa Review’s recommendations.
Centre for Finance, Innovation and Technology
The Government recognises the potential for a private-sector-led Centre for Finance, Innovation and Technology (CFIT) as an accelerator for FinTech sector growth and the Government will work closely with the FinTech community to establish this.
The Financial Conduct Authority (FCA) has welcomed the Kalifa Review and set out steps it will be taking to deliver against the Review’s idea for a ‘regulatory scalebox’, by enhancing its existing regulatory toolkit. These actions include:
- Launching ‘Always Open’ to make the Regulatory Sandbox available on a rolling basis.
- Clarifying the scope of qualifying propositions for the Regulatory Sandbox to ensure as many firms as possible are able to access support.
- Launching, in conjunction with the City of London Corporation, the second phase of the Digital Sandbox pilot, inviting applications to test proof of concepts to solve sustainability and climate change financial challenges.
- Considering how to provide a ‘one-stop-shop’ for growth-stage firms to dock in and easily navigate what sources of FCA support are available to them.
- Working with industry over coming months to identify further solutions for supporting firms manage the journey to scale.
The FCA has also announced plans to create a regulatory ‘nursery’ for enhanced oversight of newly authorised firms, enabling an opportunity for additional support as firms become used to the requirements of regulatory compliance.
The Listings Review conducted by Lord Hill addresses a number of the Kalifa Review’s recommendations for attracting more FinTech listings to the UK. The FCA plans to consult on issues raised by the Kalifa Review, including reducing the minimum ‘free float’ a company must have when it lists, and whether premium listed companies can have dual share class structures.
The Government supports attracting international talent to the UK and is creating a ‘scale-up visa stream’. This will be created within a new elite points-based route that will allow employees with a job offer at the required skills level from a recognised UK scale up, including FinTechs, to qualify for a fast-track visa, without the need for sponsorship or third-party endorsement. The Government will set out further details by July 2021 and the new route will be implemented by March 2022.
The Department for International Trade (DIT) has announced it will create two new FinTech initiatives in response to the Kalifa Review. The first is a new FinTech cohort within DIT’s Export Academy initiative and the second is a FinTech Champions scheme, comprising leading UK FinTech advocates who are successfully exporting.
Regulation for digital finance
The Review also made recommendations more broadly for the Government to develop a regulatory framework for digitalisation and emerging technology in financial services and the Written Statement sets out how the Government is taking forward a number of initiatives in these areas.
The Kalifa Review also highlighted the benefits of tax incentive schemes in supporting FinTech growth and at Budget 2021, the Government announced steps it is taking to ensure the schemes work as efficiently as possible, including:
- A Call for Evidence on the Enterprise Management Incentive scheme to seek views on whether the scheme is meeting its objectives, and examine whether more companies should be able to access the scheme.
- A review of R&D tax reliefs which follows the consultation last year on expanding the qualifying expenditures to include cloud computing and data.
(Kalifa Review of UK FinTech sector, Written Statement by Chancellor of the Exchequer, 26.04.2021)
Glass Lewis: Say on Climate Votes – Overview
On April 28, 2021, Glass Lewis published a note on its initial observations and considerations when evaluating management and shareholder proposals concerning the adoption of an annual shareholder vote on a company’s climate strategies, or Say on Climate, at 2021 AGMs. Glass Lewis intends to codify its approach in advance of the 2022 proxy season, following investor, corporate and stakeholder engagements.
Glass Lewis notes that, given the broad variety of proposals (both management and shareholder), and the lack of standardisation on how shareholders should evaluate each of the climate plans submitted to a vote, Glass Lewis will continue to maintain a case-by-case approach on this issue.
It states that the two main types of management proposals (examples of which are provided) are:
- To establish a policy that would create the framework for the adoption of an annual vote on climate disclosure/strategy, or Say on Climate at future AGMs; and
- To request shareholder approval of a company’s climate transition plan, or hold a Say on Climate at the 2021 AGM.
In its experience, shareholder proposals are only of the variety that seeks the adoption of a Say on Climate proposal at future AGMs, rather than requesting a vote on any climate plans at the 2021 AGM. However, these shareholder proposals have also varied significantly and Glass Lewis groups them into the following categories (providing some examples):
- Proposals that solely request a Say on Climate at future AGMs;
- Proposals that solely request a Say on Climate at future AGMs but make other suggestions worded so as to be optional;
- Proposals that request a Say on Climate at future AGMs bundled with other implicit or explicit climate themed requests (e.g. reduction of emissions).
Glass Lewis sets out concerns about these proposals that some investors have expressed and, since it shares some of these concerns, during the 2021 proxy season, Glass Lewis will generally recommend against management and shareholder proposals requesting that companies adopt a policy that provides shareholders with an annual Say on Climate vote on a plan or strategy. When companies bypass that step, and place their climate plans up for an advisory vote, Glass Lewis will evaluate these climate plans on a case-by-case basis, taking into account the following:
- The provision by companies of context for shareholders as to how the company views the roles of the board and shareholders in executing their plans. Glass Lewis highlights a disclosure by French infrastructure company, VINCI, in its 2021 AGM Notice which makes it clear that its environmental approach lies with the board and executive management committee, and shareholders are not being asked to take responsibility for this approach, and also sets out how it intends to respond should the proposal fail, and part of that response is engaging with its shareholders. Where Glass Lewis does not find these assurances in the meeting materials, it will typically recommend that shareholders abstain on proposals approving the plans.
- What the proposal is asking shareholders to approve. Glass Lewis looks favourably on proposals seeking approval of the company’s disclosures and commends resolution 4 in Aviva plc’s 2021 Notice of AGM in this regard.
- The company’s climate plans or ambitions. Where Glass Lewis believes that the plans insufficiently address issues related to climate change, it may, instead of abstaining, recommend that shareholders vote against such plans.
(Glass Lewis: Say on Climate Votes – Overview, 28.04.2021)