The uptick in fraud over the course of the pandemic has put an unprecedented level of pressure on UK regulators, says Rachel Adamson, director, Adkirk Law.

In the past year, this tension has forced the FCA to release a flurry of announcements, detailing their plans to protect consumers, and saw the agency issue over £567m in regulatory enforcements - a £375m increase on 2020.

As part of this wider move, the FCA recently launched a fresh consultation on the promotion and marketing of high-risk investment products.

The proposed legislation takes a slightly different approach to that which we have previously seen from the FCA, and one that could prove more effective.

Whilst blanket legislation has historically played a large role in FCA regulation, the recent consultation favours a more targeted approach that places far greater responsibilities on professionals to ensure customers fully understand the products they are buying.

This is good news for the promotional, intermediary players that work in the ‘grey area', who want to differentiate themselves from the dubious characters also operating in the same space. However, in simple terms, financial services professionals just got a lot of homework.

Homework for professionals

With the FCA aiming to implement the new rules within the year, anyone operating in the UK consumer investment market should be paying close attention to the proposed legislation. Whilst the FCA is seeking to take a more targeted approach, it has clearly stated its intent to bring all relevant areas into line with far reaching parameters as to whom this regulation will apply to.

As such, any professional who sells, markets, and promotes investment products must take heed of the proposed rules, as must independent financial advisers and firms that advise on purchasing investment products. This is regardless of whether those professional fall within or without regulated activities in the current regime.

One stand-out aspect of the proposed new rules is the requirement for due diligence around an investment product, which has historically been the responsibility of the consumer.

However, under new regulation, financial professionals promoting, selling, or advising on the purchase of a product now have a duty of consumer care that will require them to carry out due diligence on the consumer's behalf.

Professionals will also need to carry out more in-depth due diligence to gain a thorough understanding of a consumer's financial goals, attitude towards risk, and other factors that will inform which products should be promoted or sold to them. They will then be responsible for matching the consumer with the right product based on this profile.

In the past, promotional and marketing firms, including those that operate online from overseas, have enjoyed a degree of separation from the end consumer that has relieved them of heavy due diligence requirements. The exemptions for High-Net-Worth individuals and Sophisticated Investors may come under scrutiny.

The proposed new rules from the FCA look set to substantially change this and could prove a splash of cold water in the face to those that aren't well prepared.

Duty of care

Alongside increased due diligence of both product and customer, professionals that promote high-risk consumer investments will have greater liability for ensuring the customer fully understands the product.

In particular, the regulation outlines the duty of professionals to provide in-depth, easily understandable information on how a product works, and what specific risks are involved.

This opens the door for consumer complaints that they were not offered sufficient advice, or that it was not given in clear enough terms.

Under the proposed new regulations, the professional who promoted or sold the product to the consumer would be held responsible. As such, understanding to what extent guidance must be offered, as well as knowing what regulators will consider an acceptable degree of clarity around this advice, will be crucial once the rules come into force.

A line in the sand

Ultimately, for professionals operating in the promotional and advertorial space of consumer investment who try to reflect and mirror the wider regulation to offer a fair service - of which there are many - the proposed new regulation will prove a benefit. It will draw a clearer line in the sand between them and the ‘cloak and dagger' firms that tread the regulatory line when marketing products.

Nonetheless, professionals working with UK businesses shouldn't hesitate to get to grips with the proposed new rules, or they could find themselves under the regulatory hammer in the years ahead.

By Rachel Adamson, director, Adkirk Law.