It’s been a long time coming and much-trailered, but now the UK Government’s new Financial Services Bill has finally materialised. Apart from the end of the Financial Services Authority, what will be the key changes for UK marketers and advertisers involved in financial promotions? Miah Ramanathan reports.
Topic: Financial services
Who: UK Government
Where: UK
When: Early 2012
Law stated as at: 1 May 2012
What happened:
Overview
The UK Government published the Financial Services Bill (the "Bill"). The Bill is the key component in its strategy to address the failings of the current regulatory framework and implement a new system for financial regulation in the UK.
The Bill abolishes the existing tripartite structure composed of the Bank of England, the FSA and the Treasury and establishes a new framework for financial regulation through the creation of the Financial Policy Committee (FPC), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
The Bill details the objectives and principles by which the FPC, PRA, FCA and the Bank of England will operate and provides each with a range of powers to fulfil these mandates. The Bill makes a number of key changes to the existing legislation, including amendments to the Financial Services and Markets Act 2000 ("FSMA").
One of these key changes is to empower the FCA to direct an authorised firm to withdraw a financial promotion that the FCA considers to be in breach of, or is likely to breach, the rules concerning financial promotions and to disclose to the public the fact of such direction.
This has been heralded as marking a significant shift from the current position concerning public censure and having a number of consequences for firms forced to publicise the fact of a direction from the FCA. However, in reality, the FSA already has very wide-ranging powers to direct firms to take action to remedy regulatory breaches and to publicise enforcement action taken against firms, so the amendment may be most significant as a statement of regulatory intent.
Financial promotions and the current disclosure of enforcement action
Section 21 of FSMA provides that a firm must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless it is an authorised firm, or the content of such communication is approved by an authorised firm, or falls within the statutory exemptions set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529). This broad restriction captures all promotional activity, including traditional advertising and telephone sales, in relation to all products and services regulated by the FSA. The purpose of the restriction is to safeguard consumers from making poorly informed decisions in relation to financial products or services.
Breach of section 21 of FSMA by an unauthorised firm gives rise to civil and criminal liabilities, including imprisonment for a term not exceeding two years or a fine or both. Any authorised firm found to have been involved in the communication or approval of financial promotions in breach of the FSA rules will be subject to disciplinary action by the FSA as set out in its Enforcement Guide and the Decision Procedure and Processes Manual (DEPP), which includes financial penalties and public censure.
The Enforcement Guide provides that if the FSA commences an investigation into a suspected breach of the FSA rules by an authorised firm, it may issue: a private warning to the firm concerned at any point in the enforcement procedure; and a public decision notice or final notice at the conclusion of the investigation. DEPP 6.4 sets out the criteria for determining whether it is appropriate for the FSA to issue a public censure and/or impose a financial penalty. The criteria include a number of considerations including:
• whether deterrence would be effectively achieved by issuing a public censure;
• whether the breach has been admitted and the authorised person provided full and immediate co-operation to the FSA; and
• the disciplinary record or compliance history of the authorised person.
This approach to the publication of investigations into suspected breaches of the FSA's rules on financial promotions drew criticism from a number of sources, including the Financial Services Consumer Panel and the Advertising Association. The key issue was the perceived lack of transparency arising from the very limited public censure of non-compliant activity. The approach of the Advertising Standards Authority to enforcement and its practice of publishing all of its adjudications and maintaining a transparent record of its policy and operations was advocated as a viable model of practice for the FCA. It is this practice of early public censure that is tackled in the Bill.
The impact of the Financial Services Bill on financial promotions
The Bill introduces a new power for the FCA to make rules applying to authorised firms in relation to the regulation of financial promotion, including provisions about the form and content of any communications.
A new section 137Q to FSMA provides the FCA with the power to direct an authorised firm it considers has, or is likely to have, breached the financial promotion rules, to:
• withdraw the communication or approval of it;
• refrain from making the communication or giving the approval;
• publish the details of the direction from the FCA in the public area; and/or
• do anything else the FCA directs it to.
Why this matters:
This new power marks a significant shift from the existing position in relation to the publication of FSA investigations and enforcement action. In extreme cases, an authorised firm can be required to publicise the details of an investigation at a much earlier stage and well before it has had the opportunity to address the issues raised by the direction and make representations in its defence.
In practice however, if a firm were instructed to withdraw marketing materials by the FSA, there are only limited circumstances in which it would be practical for the firm to resist the FSA's instruction.
Even if the FSA did not feel it had grounds to bring enforcement action in respect of the breach, it has other regulatory tools, such as the ability to initiate section 166 skilled persons' reports at the expense of the firm, for it to be advisable for firms to adopt a confrontational approach. What the amendment does signify is an increasing trend for the FSA to be entrusted with the powers of judge and jury and, therefore potentially less inclination to listen to the reasonable objections, justifications or opinions of firms.
The introduction of this mechanism for public censure at an earlier stage in an investigation into the activities of an authorised firm in relation to financial promotions is intended to address the perceived lack of transparency and market awareness of non-compliant activity.
A direction from the FCA to an authorised firm requiring the publication of the fact of an investigation could, once in the public arena, cause reputational damage and discourage investors. It remains to be seen if this is a proportional and effective means of addressing the deficiencies within the current approach to breaches of the financial promotion rules and public censure.
