COBS 4.12A Promotion of restricted mass market investments

1The rules in this section:

1. (1)

   require that any financial promotion relating to a restricted mass market investment includes a prescribed form of risk warning;5

2. (2)

   restrict the communication and approval of direct offer financial promotions in relation to restricted mass market investments except where certain conditions are satisfied; and5

3. (3)

   require that a financial promotion which relates to a restricted mass market investment does not offer to any retail client any form of incentive. The purpose of this rule (COBS 4.12A.7R) is to ensure that retail clients are not persuaded or incited to engage in investment activity relating to a restricted mass market investment other than by reference to the features of the investment activity that is the subject of the financial promotion.5

1COBS 4.12A.15R does not apply in relation to credit union subordinated debt or to deferred shares issued by a credit union. Firms are reminded that CREDS 3A contains requirements regarding the retail distribution and financial promotion of these instruments.

1The requirements in this section relating to the provision of risk warnings are in addition, and without prejudice, to firms’ other obligations in relation to the provision of information.

1For the purposes of COBS 4.12A.7R, monetary and non-monetary incentives include, but are not limited to:

1. (1)

   offering bonuses when investing in a restricted mass market investment5;

2. (2)

   offering bonuses where the client refers another person;

3. (3)

   offering cashback when investing in a restricted mass market investment;

4. (4)

   offering discounts or rebates on fees paid that are linked to volumes of trades made in5 restricted mass market investments;

5. (5)

   offering free gifts once an investment in a restricted mass market investment has been made such as laptops or mobile telephones; or

6. (6)

   offering any additional free investments or offering discounts on investments.

1. (1)

   Information and research tools do not constitute non-monetary incentives.5

2. (2)

   Lower fees or charges not linked to volumes of trades, made available to all retail clients, do not constitute a monetary incentive.5

3. (3)

   The effect of COBS 4.12A.7R(4) is that a financial promotion may offer an incentive to transfer an existing holding of a restricted mass market investment (for example, from one platform to another). However, the incentive must relate solely to the transfer and must not be used to encourage retail clients to otherwise engage in investment activity in relation to restricted mass market investments. 5

5Subject to COBS 4.12A.8G and COBS 4.12A.9G, the following factors are otherwise relevant in determining whether a benefit is an incentive:

1. (1)

   A benefit which is intrinsically connected with the investment or investment activity that is the subject of the financial promotion is unlikely to constitute an incentive – for example, voting rights which are carried by a share. However, a benefit which is entirely separable from the investment or investment activity that is the subject of the financial promotion is likely to be an incentive.

2. (2)

   A benefit which is only available for a fixed period of time, or is contingent upon investing in a restricted mass market investment in the future, is likely to constitute an incentive. This would not include, for example, a benefit which is offered in connection with a specified event, such as the first close of an investment.

3. (3)

   A benefit which is only available to retail clients who invest through a particular medium is likely to constitute an incentive – for example, a benefit which is only offered to retail clients who invest via a social media link.

1. (1)

   5COBS 4.12A.7R applies irrespective of the nature of the investment activity. This means that the rule applies not only in relation to incentives to buy restricted mass market investments but also, for example, to incentives to enter into agreements for the purposes of transacting in restricted mass market investments.

2. (2)

   The rationale for offering the incentive is immaterial. This means that the rule applies to incentives which are intended, for example, to encourage retail clients to make investments ahead of the end of the tax year.

1. (1)

   1Reference in COBS 4.12A.11R(5)(b)(i)(B) to the ‘provision’ of an investment is to a person developing, managing or packaging an investment such as an operator. It does not refer to persons involved in distributing, or intermediating the sale of, an investment such as a financial adviser, a person arranging investments or an operator of an electronic system in relation to lending.

2. (2)

   A firm relying on COBS 4.12A.11R(5) should consider obtaining external legal advice (from legal advisers with relevant expertise and experience) on the appropriateness of omitting the words in that rule from a risk warning. Any such advice should be recorded as part of the firm’s compliance with COBS 4.12A.11R(5)(c).

1. (1)

   1Even where it is not possible to provide a risk warning in a durable medium (for example, because the financial promotion is a real time financial promotion), the recipient of the financial promotion must still ordinarily be provided with an appropriate risk summary in a durable medium at or around the time that the financial promotion is communicated (COBS 4.12A.11R(4)(b)).

2. (2)

   It is unlikely to be possible to comply with COBS 4.12A.11R(4)(b) where the financial promotion is communicated by means of (without limitation) a television or radio broadcast. In such a case, the financial promotion must still include the relevant risk warning specified in COBS 4.12A.11R(1).

1. (1)

   1COBS 4.12A.15R to COBS 4.12A.35G apply in relation to direct offer financial promotions to retail clients in relation to restricted mass market investments.

2. (2)

   A firm may communicate information about a P2P agreement or a P2P portfolio to a retail client before COBS 4.12A.15R applies, provided that the defining elements of a direct offer financial promotion are not present in that communication. This information may comprise, without limitation, mandatory disclosures applicable to that firm, such as those set out in COBS 18.12.24R to COBS 18.12.28R, including information about:

   1. (a)

      the identity of the borrower(s);

   2. (b)

      the price or target rate, provided they are accompanied by a fair description of the anticipated actual return, taking into account fees, default rates and taxation;

   3. (c)

      the term;

   4. (d)

      the risk categorisation; and

   5. (e)

      a description of any security interest, insurance, guarantee or other risk mitigation measures adopted by the firm.

3. (3)

   2COBS 4.12A.18R (First condition: cooling off period) does not apply where a direct offer financial promotion to a retail client relates only to a unit in a long-term asset fund.

1The effect of COBS 4.12A.15R and related provisions in this section is that:

1. (1)

   a personalised risk warning and cooling off period are only required on the first occasion that a firm, or other person communicating an approved direct offer financial promotion, communicates a direct offer financial promotion relating to a restricted mass market investment (other than a unit in a long-term asset fund) 2to a particular retail client;

2. (1A)

   2where a direct offer financial promotion relates only to a unit in a long-term asset fund:

   1. (a)

      a personalised risk warning is required only on the first occasion that a firm, or other person communicating an approved direct offer financial promotion, communicates a direct offer financial promotion to a particular retail client; and

   2. (b)

      a cooling off period is not required;

3. (2)

   an appropriateness assessment is only required on the first occasion that a particular retail client responds to a direct offer financial promotion relating to a specific type of restricted mass market investment (although a firm should consider whether it would be in the best interests of the retail client for a further assessment to be undertaken, for example due to lapse of time, even where this is not required); and

4. (3)

   in any case, a direct offer financial promotion relating to a restricted mass market investment can only be communicated to a retail client who has a current statement (completed and signed within the period of 12 months ending with on the day on which the communication is to be made) of a type falling within COBS 4.12A.22R and which applies to the type of restricted mass market investment to which the direct offer financial promotion relates.

1COBS 4.12A.18R does not prevent the person who is subject to it from engaging with the retail client during the cooling off period. This includes for the purposes of providing the client with the personalised risk warning required by COBS 4.12A.20R and obtaining the information necessary to undertake the appropriateness assessment required by COBS 4.12A.28R.

1Where the direct offer financial promotion will relate to more than one type of restricted mass market investment, the condition in COBS 4.12A.21R may be satisfied by the retail client signing a combined statement that meets the requirements in COBS 4 Annex 2R to COBS 4 Annex 5R, as applicable, in respect of each type of restricted mass market investment to which the direct offer financial promotion will relate.

1. (1)

   31Where the restricted investor statement (COBS 4 Annex 5R) refers to a restricted investor not investing more than 10% of their net assets, this refers to the retail client’s aggregate investment across all types of restricted mass market investment.

2. (2)

   3However, a retail client may be informed that they need not include in the calculation referred to in (1) any investment in a restricted mass market investment made in response to a direct offer financial promotion for the purpose of which they were categorised as sophisticated (whether on a certified or self-certified basis).

1. (1)

   1The fourth condition is relevant if the recipient of the direct offer financial promotion makes an application or order for a restricted mass market investment in response to that direct offer financial promotion.

2. (2)

   The fourth condition requires a restricted mass market investment to be assessed as appropriate for a retail client before an application or order is processed. The rules and guidance are not prescriptive as to how such an assessment is undertaken. The condition is designed to ensure that retail clients are only able to invest in restricted mass market investments which they have the knowledge and experience to understand, particularly in relation to the risks. Appropriateness processes should be designed to this end.

1. (1)

   1If the person in COBS 4.12A.28R(1) is not a firm, the effect of COBS 4.12A.28R(2) is that the person is required to undertake that assessment as if the rules in COBS 10 or COBS 10A applied to them.

2. (2)

   The firm or person in COBS 4.12A.28R(1) can gather information for the purpose of assessing, and undertake its assessment of, whether a restricted mass market investment is appropriate for a retail client before the end of any 2‘cooling off period’ required by COBS 4.12A.18R.

1The effect of COBS 4.12A.28R to COBS 4.12A.32R is that:

1. (1)

   direct offer financial promotions relating to restricted mass market investments may only be communicated, or approved for communication, to retail clients if any application or order received in response to that direct offer financial promotion will be fulfilled only where that restricted mass market investment has been assessed as being appropriate for that retail client;

2. (2)

   if the assessment of appropriateness results in the provision of a warning (a determination that the restricted mass market investment is not appropriate for the retail client (COBS 10.3 or COBS 10A.3)), then an order or application received in response to a direct offer financial promotion may not be fulfilled; and

3. (3)

   the circumstances in which an assessment of appropriateness need not be undertaken (COBS 10.4 and COBS 10A.4) are not relevant for the purpose of the fourth condition.

1When gathering information regarding a retail client’s knowledge and experience for the purpose of assessing whether a restricted mass market investment is appropriate for that retail client, the firm or person undertaking the assessment should:

1. (1)

   avoid asking the retail client questions that invite binary (yes/no) answers;

2. (2)

   if asking multiple-choice questions, use questions which offer at least 3 plausible answers (excluding the option to answer ‘do not know’, or similar); and

3. (3)

   ensure that questions address matters that are relevant to the specific type of investment in which the retail client has expressed interest (see also COBS 10.2.2R).

1. (1)

   1A retail client should only be informed of the outcome of an appropriateness assessment once they have provided all of the information required for the assessment to be undertaken.

2. (2)

   COBS 4.12A.31R(2) does not prevent a retail client from being informed of the broad reasons for which a restricted mass market investment was assessed not to be appropriate for them or of the nature of the deficiencies identified in their knowledge or experience. The rule is intended to prevent a retail client from being informed only of the questions within an assessment which led to a restricted mass market investment being assessed not to be appropriate such that the client is able simply to change their answer in any subsequent assessment without improving their own understanding.

3. (3)

   For the purposes of COBS 4.12A.31R(3), any questions used to undertake a further assessment of appropriateness should be sufficiently different such that the retail client could not simply infer the answers that would lead to an assessment of appropriateness from the outcome of their responses to a previous set of questions.

4. (4)

   A firm should consider whether the particular features of a restricted mass market investment mean that an interval of greater than 24 hours should be applied following a second assessment (and any subsequent assessment)4 that that investment is not appropriate for a retail client (COBS 4.12A.32R(2)).

5. (5)

   A retail client may be informed of the option to re-apply to buy a restricted mass market investment following a determination that the restricted mass market investment is not appropriate for them. However, the retail client should not be encouraged to do so.

1. (1)

   3The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing digital financial promotions and, in particular, how the risk warning will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

2. (2)

   Firms should have regard to the intended or likely recipients of a financial promotion. Where a firm considers that such persons are unlikely to have a good understanding of the English language, a risk warning or risk summary required by the rules in this section should be provided in an appropriate language in addition to English.

1For the purposes of COBS 4.12A.38R, design features which might reduce the visibility or prominence of a risk warning or risk summary include, but are not limited to:

1. (1)

   using a font size for the risk warning or risk summary that is smaller than the standard size used in the financial promotion;

2. (2)

   using a background colour that does not sufficiently contrast the text or makes it difficult for the client to read the text;

3. (3)

   fading the text of the risk warning or risk summary;

4. (4)

   placing the risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

5. (5)

   requiring additional links to be clicked in order for the full text of the risk warning to be seen;

6. (6)

   using a font or background in the risk warning or risk summary in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

7. (7)

   using a font or background in the risk warning or risk summary in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the risk warning or risk summary from other forms of information.

1. (1)

   3The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing digital financial promotions and, in particular, how the personalised risk warning or risk summary will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

2. (2)

   Firms should have regard to the intended or likely recipients of a financial promotion. Where a firm considers that such persons are unlikely to have a good understanding of the English language, a risk warning or risk summary required by the rules in this section should be provided in an appropriate language in addition to English.

1For the purposes of COBS 4.12A.42R, design features which might reduce the visibility or prominence of a personalised risk warning or risk summary include, but are not limited to:

1. (1)

   using a font size for the personalised risk warning or risk summary that is smaller than the standard size used in the financial promotion;

2. (2)

   using a background colour that does not sufficiently contrast the text or makes it difficult for the retail client to read the text;

3. (3)

   fading the text of the personalised risk warning or risk summary;

4. (4)

   placing the personalised risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

5. (5)

   requiring additional actions to be taken by the retail client, such as requiring additional links to be clicked in order for the full text of the personalised risk warning or risk summary to be seen;

6. (6)

   using a font or background in the risk warning in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

7. (7)

   using a font or background in the risk warning in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the personalised risk warning or risk summary from other forms of information.

1For the purposes of COBS 4.12A.44R(2), the following reasons are considered to be valid:

1. (1)

   the relevant part of the risk summary in COBS 4 Annex 1R would be misleading in relation to the particular investment;

2. (2)

   the relevant part of the risk summary in COBS 4 Annex 1R would be irrelevant in relation to the particular investment;

3. (3)

   the risk summary in COBS 4 Annex 1R does not include a risk that is relevant to the particular investment and it is appropriate for that further risk to be included;

4. (4)

   the sole purpose of the relevant statement in the risk summary is to include a hyperlink to a webpage and the medium of communication does not permit the incorporation of a link;2

5. (5)

   2the firm is required to adapt the risk summary in accordance with COBS 4.12A.11R(8) (Risk warning) or COBS 4.12A.20R(8) (Second condition: personalised risk warning).

This list is not exhaustive.

2A firm communicating a risk summary relating to units in an LTAF (see COBS 4 Annex 1R(7) (Risk summaries)) is required to adapt the risk summary to reflect the characteristics of the relevant LTAF, particularly the dealing arrangements for the LTAF and the applicable notice period (see COBS 4.12A.11R(8) (Risk warning) and COBS 4.12A.20R(8) (Second condition: personalised risk warning)). Other amendments may also be appropriate. When amending the risk summary, the firm will need to comply with COBS 4.12A.44R(2).