Spurred by the need to implement the Markets in Financial Instruments Directive, the FSA is consulting on major changes to how it generally regulates financial promotions.
Topic: Financial services
Who: Financial Services Authority
When: October/November 2006
Where: Canary Wharf
Back in October 2006, the FSA issued a consultation paper CP06/20 seeking views on its proposals to implement a more principles-based regime for financial promotions and other communications. The CP follows on from the FSA's recent Financial Promotion Review and its general commitment to more principles-based regulation.
In addition, the CP proposes rules and guidance to implement the conduct of business obligations in the EC's Markets in Financial Instruments Directive (MiFID) in relation to 'all information' and 'marketing communications'. MiFID will replace the existing Investment Services Directive and will have a major impact on investment and other financial services in the UK as well as elsewhere within the EU. While the new rules will not take effect until 1 November 2007 (the implementation date for MiFID), because the FSA plans to meet the January 2007 deadline for the transposition of MiFID, the consultation period was relatively short and closed on 28 November 2006. Feedback on responses is expected in Q1 2007.
The FSA proposes two chapters to replace COB3 – NEWCOB 4 and 5 – which in aggregate are substantially shorter, with fewer detailed rules. This simplicity is however infected by the complexities that the FSA's Conduct of Business Sourcebook must cover both financial services within MiFID's scope (MiFID business) and all other financial services regulated by the FSA, eg banking, insurance, mortages, etc. While at present there is a single concept of "financial promotions" (which applies to all financial services), MiFID introduces two further concepts, namely, "all information" and "marketing communications" (which only applies to MiFID business).
Concept not well defined
These three concepts are not well defined and their interaction poses a number of general questions when considered and applied in practice. It is not immediately clear for example whether all marketing communications are financial promotions: there seems, however, to be a general consensus that all financial promotions must be marketing communications, and that the MiFID concept of all communications goes beyond the FSA's Principle 7 (broadly, that a firm must communicate information to its clients in a way which is clear, fair and not misleading) which currently only applies to communications by firms with clients. Notwithstanding a move to principles-based regulation, any changes to the scope of these principles and any related detailed rules needs to be clear and understood.
Another complexity inherent in MiFID is the use of slightly different wording with different meanings on the continent and in the UK. For example, another general rule in COB 2.1.3 recognises the concept of "reasonable steps"; broadly, this rule provides that a firm must take reasonable steps to communicate information to a customer in a way which is clear, fair and not misleading. MiFID has no such qualification on its face, referring simply to the firm ensuring that the information is fair, clear and not misleading. At this stage, the FSA's intelligent copy out approach has not reflected the difference between the two, so potentially leaving firms with a significantly higher (and potentially impossible) standard to comply with.
There are many other aspects of the CP one could comment on, however, these seem to the author to be the most significant. Any further queries on financial promotions or MiFID should be directed to our Financial Services team, who can be contacted through Paul Anning, Partner (direct line: 020 7105 7446; email: firstname.lastname@example.org).