10.01  The restriction on making a financial promotion, contained in section 21 FSMA, complements the general prohibition in section 19 FSMA by restricting the issue of marketing material for products and services regulated under FSMA to authorised persons. A person who is not authorised may not issue marketing material unless it has either been approved by an authorised person who accepts responsibility for its contents, or it otherwise falls within an exclusion prescribed by the Financial Promotions Order (FPO).

10.02  An authorised person’s main concern when issuing a financial promotion, certainly for the general retail market, is to follow the FCA’s requirements for contents and clarity unless, exceptionally, the promotion falls within the FPO. When an unauthorised person wishes to issue a financial promotion its concern will be to ensure that it does fall within the FPO, or otherwise it will need to arrange for an authorised person to approve the promotion, which in practice few firms are prepared to do unless they are in the same group as the unauthorised person, or otherwise have some commercial interest in the subject of the promotion.

10.03  While a number of FCA enforcement decisions illustrate the standards that the FCA expects firms to observe when making a financial promotion (see section V), there has been little (p. 341) judicial interpretation of either the meaning of financial promotion or the exclusions contained in the FPO. For this reason a key source for understanding the FCA’s approach is the lengthy explanation of its policy and approach towards each of these elements contained in chapter 8 of its Perimeter Guidance (PERG 8), referred to in sections II and IV of this chapter.

10.04  This chapter reviews in turn:

1. a.  the elements of the restriction on making a financial promotion such as the meaning of communicate, invitation, inducement, controlled investments, and controlled activities (II);

2. b.  the offence of contravening the restriction on making a financial promotion, and its consequences contained in sections 25 and 30 FSMA (III);

3. c.  the exclusions from the restriction on making a financial promotion contained in the Financial Promotions Order (IV);

4. d.  the FCA’s rules and policy on financial promotions and customer communications (V).

10.05  The restriction on making a financial promotion states that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless that person is an authorised person or the content of the communication is approved for the purposes of this section by an authorised person (section 21(1) and (2) FSMA). The expression financial promotion does not appear in the statute other than in the heading and side-title to section 21 and, while used extensively in the FCA rulebook, the glossary definition merely reproduces the wording of section 21. Headings and sidenotes are, however, recognised as admissible aids to construction and the concept of promotion is key to the interpretation of the statutory restriction.¹ In the absence of statutory definition or judicial interpretation (the cases below apply the concept rather than analyse the meaning), it is considered that it should be given its ordinary English meaning, which is of an activity that seeks to increase sales or awareness, encourages someone to do something, or which publicises a product or service. A financial promotion, and hence the activity falling within the scope of section 21, therefore requires a promotional element and a degree of incitement. Examples of communications that the court has, in the circumstances of the case, recogniserecognised as possessing these elements and therefore as financial promotions include:

1. a.  issuing promotional brochures;²

2. b.  maintaining a website;³

3. c.  holding a seminar and convening meetings for prospective investors;⁴

4. d.  making telephone calls;⁵

5. e.  issuing an information memorandum or research report;⁶

6. f.  sending a letter inviting a prospective investor to make contact.⁷

(p. 342) By contrast, a purely factual communication that is not promotional, or one neither intended nor likely to incite recipients to take action, will not be a financial promotion.⁸

10.06  The elements of section 21 are remarkable both for their breadth and complication, illustrated by the FCA’s explanatory guidance on this and the FPO running to nearly 130 pages.⁹ There are five principal elements to the wording in section 21 that we now review.

10.07  To ‘communicate’ in this context means to share or pass on information to another, and is sufficiently broad to encompass a communication that is oral or written, printed or electronic, personal or broadcast, live or recorded. For the purposes of a financial promotion, a person (A) will communicate in any of the following circumstances:

1. a.  Where the communication is to a selected individual—A speaks to B face to face, telephones B, writes to B or sends a text message or an e-mail to B.

2. b.  Where the communication is to a group of people—A addresses a meeting of 100 people, Tweets to his or her followers or issues a circular to 1,000 people chosen from a mailing list, or texts or e-mails them.

3. c.  Where it is a mass communication—A places an advertisement in a newspaper, inserts a leaflet in a newspaper, places posters on the London Underground, or erects banners at the Boat Race. This will also include electronic communications, such as where A is interviewed on the wireless, makes a recording available on the internet or creates a publicly available website.

10.08  A communication may be made or directed. Where a communication is:

1. a.  a conversation, letter or e-mail, it is made by being addressed to a particular person, who is to be viewed as the recipient, but not to anyone else who may read it or hear it;

2. b.  a broadcast, a newspaper advertisement or a website, it is addressed to persons generally (the recipients), and it is to be viewed as directed at them.

10.09  Communicating includes causing a communication to be made (section 21(13) FSMA); causing something to happen means making it happen and so, in this context, a person will be communicating within section 21 if he instructs or enables another to do any of the things that constitutes a communication; in other words, where he is responsible for it. A written communication is communicated by its originator, the person responsible for its overall contents, who will (for example) cause an advertisement to be communicated by arranging for a periodical to publish it. An oral communication is communicated by its speaker, the person responsible for it who will (for example) cause an interview to be broadcast by a radio station. Causing a communication to be made requires an active step by the person responsible for the promotion, such as sending a prospectus to an investor, issuing an advertisement, publishing, distributing (hence the exclusion at FPO Article 18 for conduits), making a website page or creating a hypertext link. Merely facilitating communication when ignorant of or indifferent to the contents of a financial promotion is neither communicating nor causing a financial promotion (p. 343) to be communicated, for example providing postal, telecommunications, or broadcast services, distributing leaflets, or providing a website with links to investment firms. Similarly the normal business activities of those who may be associated with financial promotions in a professional capacity such as an advertising agency, designer, printer, or legal adviser will not involve them in communicating a financial promotion, or causing it to be made.¹⁰

10.10  Both ‘invitation’ and ‘inducement’ are also left undefined, and bear their normal English meanings. An ‘invitation’ is a request inviting someone to do something, in this context to take a step that will result in them engaging in an investment activity. It may be an offer capable of acceptance such as ‘buy my shares’ or ‘let me manage your investment portfolio’. It could also take the form of an invitation to treat so that the recipient responds with an offer that the issuer of the promotion can accept. Clear examples of this are a newspaper advertisement or a direct mail leaflet for a retail investment such as units in a regulated collective investment scheme, to which a would-be investor can respond by completing the required details and submitting payment. A prospectus or other offering document for equities is similarly an invitation that can be accepted by completing the subscription form.¹¹

10.11  An ‘inducement’ is something that seeks to persuade or lead someone to do something. It falls short of being an invitation as it is not an offer capable of acceptance, but is instead a communication of a promotional nature that encourages you to engage in investment activity. It requires both an element of persuasion, and merely asking someone if they will enter into an agreement will not without more be an inducement, and an element of intention as the word ‘inducement’ connotes design or purpose.¹² An inducement is a link in a chain that is intended to lead to agreement to engage in an investment activity, and it must be a significant step in persuading a person to engage in that activity. Accordingly, in the FCA’s opinion:

1. a.  Scripts—for example for outbound customer sales calls will be inducements where they encourage customers to purchase securities, and may be an invitation where they propose a specific product or service.¹³

2. b.  An initial verbal communication with a customer—for example recommending a product of which they may not previously have heard, may be an inducement or an invitation.¹⁴

3. c.  Advertisements inviting contact—such as to contact a person to get further information about their services will not be an inducement. But where they seek to persuade the recipient to engage in investment activity, or their purpose is to offer such services, they will be an inducement.

4. (p. 344) d.  Invitations to receive literature or take a call—a caller who seeks to persuade someone to receive literature or take a call is making an inducement unless responding to a request for this.

5. e.  Offers to make an introduction—will be an inducement if the introducer seeks to persuade the person to engage in investment activity with a specific person—so that ‘I can introduce you to an IFA for advice’ is an inducement, but ‘I can introduce you to an IFA for further information’ should not be.

6. f.  Explanations—for instance of the terms of an agreement or the consequences of action are not an inducement unless accompanied by an encouragement to act.

7. g.  Enquiries—for example whether an individual is high net worth, or how they would react to an offer, are not an inducement unless accompanied by an act of persuasion.

8. h.  Reverse enquiries—such as where a person requests a company’s business plan, are not a financial promotion unless accompanied by an invitation or inducement.

9. i.  Directory listings—are not an inducement, although promotional material in a directory may be.

10. j.  Performance tables will not be an inducement when objectively compiled and they do not imply a recommendation.

11. k.  Historic data—stating past performance on its own is not an inducement unless accompanied by some promotional wording. Historical prices on their own do not seek to persuade people to engage in an investment activity and are not an inducement. Promoting past deals accompanied by contact details may be an inducement where this seeks to persuade the reader to contact the advertiser to do business with it rather than merely to find out more information.

12. l.  Website links—will be inducements where they persuade people to engage in an investment activity. Banner advertisements are likely to be inducements.

13. m.  Electronic trading systems—displaying prices may be an invitation, and indicative prices plus promotional material may be an inducement.

14. n.  Decision trees leading to recommendations of products or services are likely to be inducements.

15. o.  Journalism—a journalist’s objective assessment of an investment or its issuer or of a regulated service is unlikely to be an inducement, although a promotional piece or one containing a recommendation may well be.

16. p.  Contract documentation is not an inducement because it records terms proposed or under negotiation, although a draft accompanied by a letter recommending the deal may be an inducement or an offer.

17. q.  Image advertising that promotes a name alone is too far removed from investment activity to be viewed as an inducement.

18. r.  Company statements will not be inducements where purely factual; in other cases they may fall within FPO Article 20A.

19. s.  Employers’ communications—for example to employees on a Group Pension Scheme will only be inducements where they seeks to persuade them to join or to exercise rights.¹⁵

10.12  The FCA states that ‘in the course of business’ is different from ‘carried on by way of business’, the formula used in the general prohibition, and is not to be interpreted by reference to the (p. 345) FSMA (Carrying on Regulated Activities by way of Business) Order 2001/1177. Section 21(4) empowers the Treasury to specify what amounts to acting in the course of business in this context, but this power has not been exercised. The FCA considers that ‘in the course of business’ is fulfilled where there is a commercial interest in the activity, such as a company selling its subsidiary or raising capital, communicating to its employees in relation to health insurance, or promoting an employee share scheme.¹⁶ It is suggested that an interpretation more in keeping with the statutory scheme is that a financial promotion is communicated ‘in the course of business’ when the person who communicates it is carrying on a business and it is communicated as part of that business and, for this purpose, the elements of profit and continuity will be relevant in determining whether the activities comprise a business, as discussed in chapter 2. In relation to an individual, ‘in the course of business’ means by way of a person’s own business and not that of the company of which the person is or was a director or shadow director.¹⁷

10.13  ‘Engaging in investment activity’ means:

1. a.  entering, or offering to enter into, an agreement when either party making or performing it constitutes a controlled activity. It does not including refraining from doing any of these; or

2. b.  exercising rights conferred by a controlled investment to acquire, dispose of, underwrite, or convert a controlled investment. It does not include exercising the right to vote (section 21(8) FSMA).

10.14  An activity is a ‘controlled activity’, if it is specified, and it relates to a specified investment. An investment is a ‘controlled investment’ if it is specified, and includes any asset, right, or interest (section 21(9), (10), and (14) FSMA). ‘Engaging in investment activity’ can be either general or specific; both an invitation to buy a specific financial instrument as well as one to receive investment advice over shares as yet unidentified, or to transfer a cash balance into equities as yet unchosen which a third party will manage, will fall within this expression.

10.15  The controlled investments and controlled activities are contained in Schedule 1 of the FPO. The controlled activities differ significantly from the specified activities in RAO, although the controlled investments are nearly identical to the RAO specified investments. This has the consequence that a person may fall within an exclusion in the RAO (and hence be permitted to carry on a regulated activity in the UK without authorisation) yet be subject to the restriction on financial promotions. We now describe each paragraph of the FPO and indicate how it differs from the corresponding provisions in the RAO.

10.16  These correspond to the specified investments contained in the RAO with the omission only of RAO Article 74A—electronic money. They are, by reference to the paragraphs of FPO Schedule 1:

1. 12.  A deposit—this corresponds to RAO Article 74.

2. 13.  Rights under a contract of insurance—this corresponds to RAO Article 75. While rights to and interests under life policies are a controlled investment, those under (p. 346) other contacts of insurance are not. The activities of dealing, arranging, and advising in or on contracts of insurance are controlled activities only in relation to life policies (PERG 8.17A 1 G).

3. 14.  Shares—this corresponds to RAO Article 76.

4. 15.  Instruments creating or acknowledging indebtedness—this corresponds to RAO Article 77.

5. 15A.  Alternative finance investment bonds—this corresponds to RAO Article 77A.

6. 16.  Government and public securities—this corresponds to RAO Article 78.

7. 17.  Instruments giving entitlements to investments—this corresponds to RAO Article 79.

8. 18.  Certificates representing certain securities—this corresponds to RAO Article 80.

9. 19.  Units in a collective investment scheme—this corresponds to RAO Article 81.

10. 20.  Rights under a pension scheme—this corresponds to RAO Article 82.

11. 21.  Options—this corresponds to RAO Article 83.

12. 22.  Futures—this corresponds to RAO Article 84.

13. 23.  Contracts for differences—this corresponds to RAO Article 85.

14. 24.  Lloyd’s syndicate capacity and membership—this corresponds to RAO Article 86.

15. 25.  Funeral plan contracts—this corresponds to RAO Article 87.

16. 26.  Agreements for qualifying credit—this corresponds to RAO Article 88 (regulated mortgage contracts), but includes additional controlled investments. Qualifying credit is defined as credit provided pursuant to an agreement where (i) the lender carries on the regulated activity of entering into a regulated mortgage contract and (ii) the borrower’s repayment obligation is at least in part secured on land. This includes a both a regulated mortgage contract and also other forms of loan or financial accommodation secured on land when entered into by such a lender, such as (i) loans secured by second and subsequent charges, (ii) secured loans for buy to let or investment properties, (iii) loans secured on non-UK land, (iv) secured loans that include unsecured credit, and (v) commercial mortgages.

17. 26A.  Regulated home reversion plans—this corresponds to RAO Article 88A.

18. 26B.  Regulated home purchase plans—this corresponds to RAO Article 88B.

19. 26C.  Rights under a regulated sale and rent back agreement—this corresponds to RAO Article 88B.

20. 26D.  Relevant credit agreements—this corresponds to a credit agreement under RAO Article 88D other than a regulated mortgage contract or a regulated sale and rent back agreement.

21. 26E.  Consumer hire agreements—this corresponds to RAO Article 88E.

22. 27.  Rights to and interests in investments—this corresponds to RAO Article 89.

10.17  A number of specified activities contained in the RAO do not appear in the FPO as controlled activities, with the consequence that they fall outside the financial promotion regime. These are the RAO specified activities of:

1. a.  issuing electronic money (RAO Article 9B);

2. b.  bidding in emissions auctions (RAO Article 24A);

3. c.  debt collecting and administration (RAO Articles 37F and G);

4. (p. 347) d.  assisting in the administration and performance of a contract of insurance (RAO Article 39A);

5. e.  sending dematerialized instructions (RAO Article 45);

6. f.  managing or acting as a trustee or depository of a UCITS or an AIF (RAO Articles 51ZA to 51ZD);

7. g.  establishing a collective investment scheme (RAO Articles 51ZE and 51ZG);

8. h.  establishing a stakeholder or personal pension scheme (RAO Article 52);

9. i.  advising on stakeholder pensions (RAO Article 52B);

10. j.  advising on a regulated mortgage contract, a regulated home reversion plan, a regulated home purchase plan, or a regulated sale and rent back agreement (RAO Articles 53A to 53D);

11. k.  managing the underwriting capacity of a Lloyd’s syndicate and arranging deals in contracts of insurance written at Lloyd’s (RAO articles 57 and 58)

12. l.  administering a regulated mortgage contract (RAO Article 61(2)), a regulated home reversion plan (RAO Article 63B(2)), a regulated home purchase plan (RAO Article 63F(2)), or a regulated sale and rent back agreement (RAO Article 63J(2));

13. m.  activities relating to dormant accounts (RAO Article 63N);

14. n.  activities relating to specified benchmarks (RAO Article 63O).

10.18  We now compare the Articles in Schedule 1 of the FPO with the RAO.

1. 1.  Accepting deposits—corresponds to RAO Article 5(1), omitting the RAO exclusions but adding the qualification that, in order to be a controlled activity, the person accepting deposits must hold himself out as doing so on a day-to-day basis.

2. 2.  Effecting or carrying out contracts of insurance—corresponds to RAO Article 10 and excludes breakdown insurance (as under RAO Article 12) but not Community co-insurance (RAO Article 11).

3. 3.  Dealing in securities and contractually based investments—corresponds to RAO Articles 14 (dealing as principal) and 21 (dealing as agent). Of the RAO exclusions, only that relating to accepting instruments creating or acknowledging indebtedness (RAO Article 17) is included so that, unlike the RAO, there is no exclusion at definition level for a number of activities otherwise generally falling outside the FSMA such as dealing as principal where there is no holding out, a non-authorised person dealing in derivatives or for a company issuing its own shares.

4. 4.  Arranging deals in investments—corresponds to RAO Article 25 save that, in relation to insurance, only long-term insurance (but excluding reinsurance and single premium death and sickness cover) is included. Of the RAO exclusions, only RAO Article 27 (enabling parties to communicate) is replicated, with the omission of all others such as arrangements not causing a deal or to which the arranger is party.

5. 4A.  Operating a multilateral trading facility—corresponds to RAO Article 25D.

6. 4B.  Credit broking—corresponds to RAO Article 36A omitting all exclusions.

7. 4C.  Operating an electronic lending system—corresponds to RAO Article 36H omitting all exclusions.

8. 5A and 5B.  Debt adjusting and counselling—corresponds to RAO Articles 37D and 37E omitting all exclusions.

9. 5.  Managing investments—corresponds to RAO Article 37, omitting all exclusions.

10. 6.  Safeguarding and administering investments—corresponds to RAO Article 40, omitting exclusions other than activities not constituting administration (RAO Article 43).

11. (p. 348) 7.  Advising on investments—corresponds to RAO Article 53 but omitting the RAO exclusions.

12. 8.  Advising on syndicate participation at Lloyd’s—corresponds to RAO Article 56.

13. 9.  Providing funeral plan contracts—corresponds to RAO Article 59, but omitting the exclusion at RAO Article 60 for plans covered by insurance or trust arrangements.

14. 10–10B.  Providing, arranging or advising on qualifying credit—Articles 10, 10A, and 10B are concerned with ‘qualifying credit’ (meaning a regulated mortgage contract) and correspond to RAO Articles 61 (entering into a regulated mortgage contract, omitting all exclusions), 25A (making arrangements that bring about a transaction) and 53A (advising).

15. 10BA.  Providing relevant consumer credit—corresponds to RAO Article 60B.

16. 10BB.  Providing consumer hire—corresponds to RAO Article 60N, omitting certain exclusions.

17. 10C–10E.  Providing, arranging or advising on a regulated home reversion plan—correspond to RAO Articles 63B (providing a regulated home reversion plan), 25B (making arrangements that bring about a transaction) and 53B (advising).

18. 10F–10H.  Providing, arranging, or advising on a regulated home purchase plan—correspond to RAO Articles 63F (providing a regulated home reversion plan), 25C (making arrangements that bring about a transaction), and 53C (advising).

19. 10I–10K.  Providing, arranging, or advising on a regulated sale and rent back agreement—correspond to RAO Articles 63J (providing a regulated home reversion plan), 25E (making arrangements that bring about a transaction), and 53D (advising).

20. 11.  Agreeing to carry on a controlled activity—these are the activities in paragraphs 3 to 10BB (other than 4A) and correspond to RAO Article 64 except that paragraph 11 extends to agreeing to accept deposits and agreeing to effect or carry out a contract of insurance both activities falling outside RAO Article 64.

10.19  None of the RAO general exclusions applicable to more than one specified activity has any application in determining whether an activity is a controlled activity for the purposes of FPO. These most important of these are the exclusions relating to:

1. a.  trustees, nominees, and personal representatives (RAO Article 66)

2. b.  activities carried on in the course of a profession or non-investment business (RAO Article 67);

3. c.  activities carried on in connection with the sale of goods or supply of services (RAO Article 68);

4. d.  groups and joint enterprises (RAO Article 69);

5. e.  activities carried on in connection with the sale of a body corporate (RAO Article 70);

6. f.  activities carried on in connection with employee share schemes (Article 71);

7. g.  overseas persons (RAO Article 72);

8. h.  connected contracts of insurance (RAO Article 72B).

10.20  The territorial scope of section 21 is, in principle, unlimited so it is necessary to provide that, in the case of a communication originating outside the United Kingdom, subsection (1) applies only if the communication is capable of having an effect in the United Kingdom (section 21(3) FSMA). This means that while a financial promotion communicated anywhere (p. 349) in the world can fall within section 21, only those that are ‘capable of having an effect in the United Kingdom’ actually do so. FPO Article 21 prevents section 21 from applying to communications not directed at UK persons. It is suggested that a financial promotion will have an effect in the United Kingdom when:

1. a.  it is issued within, and capable of being acted on, in the United Kingdom because it relates to an investment relevant to United Kingdom residents, such as a United Kingdom life assurance policy; or

2. b.  it is issued outside the United Kingdom and directed at people within the United Kingdom. An example of this will be direct mail addressed to United Kingdom residents but posted in the United States; an e-mail sent to a United Kingdom addressee from France; and a website hosted in Belgium that is accessible to United Kingdom residents. It is suggested that a website will fulfil this criterion when it is in the English language, offers an investment or service that is relevant to United Kingdom residents, and contains no filter intended to dissuade them from accessing the website.

10.21  The Treasury is empowered to specify circumstances where the financial promotion restriction does not apply (section 21(5) and (6) FSMA), and has issued the FPO. This is summarised in section IV.

10.22  It is an offence to contravene the restriction in section 21, the offending communication being termed an ‘unlawful communication’ (sections 25 and 30(1) FSMA). This is subject to two defences, which are where the accused can show that either:

1. a.  he believed on reasonable grounds that the content of the communication was prepared, or approved for the purposes of section 21, by an authorised person; or

2. b.  he took all reasonable precautions and exercised all due diligence to avoid committing the offence (section 25(2) FSMA).

10.23  These defences, discussed in sections 13.13–13.14 are relevant to a person who is not an authorised person. In order to establish the first defence a person will need to show an honest but mistaken belief in one of two sets of circumstances. The first defence is to show that you believed on reasonable grounds that an authorised person had prepared or approved the unlawful communication even though this had not actually happened. Where the promotion related to a retail product apparently issued by a well-known authorised firm, it may be sufficient for the person issuing the unlawful communication to show that it resembled a genuine communication from that source. But where the unlawful communication is for a less usual product or an overseas service, it may be difficult for a person to establish this defence unless he can show that he made (and kept records of) appropriate enquiries to establish whether the communication had been prepared by an authorised person, or prepared by a third party and then approved by such person. The second defence is for a person to show that it took all reasonable precautions and exercised all due diligence to ensure that the communication was either prepared or approved by an authorised person.

10.24  An agreement resulting from an unlawful communication, meaning one that involves a contravention of the restriction on issuing a financial promotion in section 21(1), may be unenforceable. Where, in consequence of an unlawful communication, a customer enters into a controlled agreement—an agreement of which the making or performance by either party is a controlled activity (see section 10.17)—or a person exercises any rights conferred by a controlled investment (see section 10.16):

1. a.  neither the controlled agreement, nor any obligation resulting from the exercise of the rights, can be enforced against him; and

2. b.  he is entitled to recover money or other property paid or transferred by him under the agreement (or obligation), together with compensation (agreed by the parties or determined by the court) for any loss he has sustained as a result of being parted from it (section 30(2), (3), and (10) FSMA).

10.25  A person who elects not to perform an unenforceable agreement or obligation, or who recovers money or property transferred, must return money or property received by him under the agreement or as a result of exercising the rights. Where property has passed to a third party, its value is determined at the date when it was received by the person who is required to return it (section 30(11) to (13) FSMA).

10.26  Where, however, the court is satisfied that it is just and equitable, it may allow the agreement or obligation to be enforced, or the money or property to be retained, having regard to one of two factors. It is the party to the controlled agreement other than the customer who may apply for relief under this section, and this does not extend to any third party recipient.¹⁸

1. a.  Where the applicant seeking to enforce or retain is the person who made the unlawful communication (or who caused it to be made), the factor is whether he reasonably believed that he was not making one.

2. b.  Where the applicant did not make (or cause to be made) the unlawful communication, the factor is whether he knew that the agreement was entered into in consequence of one (section 30(4) to (9)) FSMA.

10.27  In a case where the applicants did not make the unlawful communication, the court considered that the following factors entitled them to relief: (a) none of them knew at the time that the agreement was being entered into in consequence of an unlawful communication; (b) they had not retained any monies; (c) none of them received monies to which they were not entitled; and (d) there had been no misappropriation of investors’ monies.¹⁹

10.28  There are a number of detailed exclusions from the restriction on issuing a financial promotion. These are contained in a statutory instrument made under section 21, the Financial (p. 351) Promotions Order. This has undergone a number of changes, and the most recent version at the time of writing is the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 SI 1529, as amended. The Financial Promotions Order (FPO) enables:

1. a.  a person who is not FSMA authorised to make a financial promotion in limited circumstances (but not to perform any regulated activity unless it can rely on an exclusion in the RAO—see chapter 3);

2. b.  an FSMA authorised person to make a financial promotion without observing the applicable conduct of business rules, although an authorised person engaging in business falling within MiFID cannot rely on the FPO and must observe the requirements of COBS 4.²⁰

10.29  FPO Articles 6 to 8 contain key definitions relevant to its interpretation. These provide as follows:

10.30  A communication means the communication in the course of business of an invitation or inducement to engage in investment activity. A communication is directed at persons when addressed generally, for example in a television broadcast or on a website, and is made to another person if addressed (orally or in legible form) to particular person(s), for example in a letter or a telephone call. Communicate includes causing a communication to be made or directed.

10.31  A recipient is a person to whom a communication is made or, for non-real time communication directed at persons generally, any person who reads or hears it.

10.32  A real time communication (RTC) is a communication made during a personal visit, a telephone conversation, or other interactive dialogue. It involves interaction and can be interrupted and so includes a conversation or a Q and A session but probably not a speech which is a monologue rather than a dialogue. Facebook and blogs are not considered to be real time media.²¹

10.33  A non-real time communication (non-RTC) is any other type of communication, including a letter, e-mail, website, broadcast or publication. These are generally in enduring form, are directed generally (although a personal letter or e-mail is clearly not), are pre-formulated and do not call for an immediate response. FPO Article 7(5) contains some factors which indicate that a communication is a non-RTC: (a) the communication is made to or directed at more than one recipient in identical terms (save for details of the recipient’s identity); (b) the communication is made or directed by way of a system which in the normal course constitutes or creates a record of the communication which is available to the recipient to refer to at a later time; and (c) the communication is made or directed by way of a system which in the normal course does not enable or require the recipient to respond immediately to it.²²

10.34  An RTC is to be treated as solicited when it is made in the course of personal visit, call, or interactive dialogue that is initiated or expressly requested by the recipient, otherwise it is unsolicited. FPO Article 8(3) contains some limitations on what may properly be regarded as solicited. A communication is solicited only if it is clear from all the circumstances when the call, visit, or dialogue is initiated or requested that during the course of the visit, call, or dialogue communications will be made concerning the kind of controlled activities or investments to which the communications in fact made relate. A person is not to be treated as expressly requesting a call, visit, or dialogue because he omits to indicate that he does not wish to receive any or any further visits or calls or to engage in any or any further dialogue; or because he agrees to standard terms that state that such visits, calls, or dialogue will take place, unless he has signified clearly that, in addition to agreeing to the terms, he is willing for them to take place. Close relatives and joint participants present when a promotion is made are covered by recipient’s solicitation. The FCA considers that a financial promotion is solicited where it is restricted to investments contemplated by the requester, so if a person requests a visit to discuss listed equities then advice on derivatives may be unsolicited. Answering a question at the presentation might amount to an unsolicited real time communication to all persons other than the questioner.²³

10.35  There are five further points of application or interpretation:

1. a.  Where the FPO requires an indication to be contained in a communication, it must be clear and prominent (FPO Article 9).

2. b.  No exemptions apply to a financial promotion which induces or invites a person to enter into a life policy with an insurer who is not authorised or exempted under FSMA, passporting from the EEA, or licensed in Jersey, Guernsey, the Isle of Man, Iowa, or Pennsylvania (FPO Article 10).

3. c.  If a communication relates to any non-insurance controlled activity other than accepting deposits, or to effecting or carrying out a qualifying contract of insurance (meaning most long-term insurance), any exclusion other than Articles 21 to 25 may be used. If a communication relates to accepting deposits or any contract of insurance that is not a qualifying contract of insurance, then only the exclusions in Articles 12 to 26 may be used.

4. d.  A person may rely on a combination of exclusions where they apply to the subject matter of a promotion (FPO Article 11), but can only rely upon an exclusion that includes a specific condition, for example being directed exclusively at persons of a certain kind, where that condition is fulfilled in respect of all recipients.²⁴

5. e.  These exclusions apply to a person causing a communication as well as to the person making it (PERG 8.6.7), and unauthorised persons who cause an authorised person to make a communication may be able to take advantage of FPO Article 17A.

We now summarise the exemptions contained in the FPO, drawing on the commentary that the FCA offers in its Perimeter Guidance Handbook. These exemptions are complex and the full text must be considered before they are relied upon.

10.36  The following exemptions apply to all controlled activities.

1. a.  A communication (but not an outgoing e-commerce communication) made to a person, or directed at persons, outside the UK whether made or directed from inside or outside the UK (FPO Article 12(1)). This exemption is subject to detailed requirements for communications ‘directed’ at a person, and an unsolicited RTC falling within Article 12(1) is exempted only if made from a place outside the UK for non-UK business (FPO Article 12(2)). The FCA considers that a communication is not directed at a person in the UK if (i) it is neither referred to in nor accessible from an issuer’s other UK publication or website directed at UK persons (which it considers fulfilled if a website is registered with a UK search engine), and (ii) there are systems in place to prevent UK recipients from engaging in the investment activity to which the financial promotion relates with the overseas person or its group, unless the financial promotion falls within the FPO.

2. b.  A customer’s communication to a provider of a controlled activity seeking information about, or seeking to acquire, the provider’s controlled investments or services where the customer is acting in the course of business and thus in principle within section 21 FSMA (FPO Article 13).

3. c.  A non-RTC/solicited RTC which follows up a prior exempt communication, such as a financial promotion to a high net worth person under FPO Article 48, in stated circumstances (FPO Article 14).

4. d.  A communication made for the introduction of the recipient to an authorised or exempted person (but not for credit broking or electronic lending), provided the introducer is unrelated to, and not remunerated by, that person and has not advised the recipient on investment activity (FPO Article 15). The FCA considers that an introducer is unremunerated where it treats commission as belonging to the recipient, who expressly agrees that it may be used to offset fees.

5. e.  A non-RTC/solicited RTC legitimately made by an exempt person and an unsolicited RTC made by an appointed representative which its principal could compliantly have made (FPO Article 16).

6. f.  A generic promotion that relates to a controlled investment or activity, but does not directly or indirectly identify any person as providing or performing it (FPO Article 17). An example could include a financial promotion issued by a trade association.

7. g.  A communication made or directed by an authorised person on behalf of an unauthorised person where the authorised person prepared the content of the communication, or the communication is an RTC (FPO Article 17A).

8. h.  A non e-commerce communication made or directed by a mere conduit, who neither devises nor controls its content, in the course of its carrying on a main business of transmitting third party material (FPO Article 18). The FCA considers that this includes telecommunication companies and internet service providers, but not newspapers or broadcast media because of the level of control that they exercise.

9. i.  An e-commerce communication falling within the categories of mere conduit, caching or hosting as defined in the Electronic Commerce Directive (FPO Article 18A).

10. j.  A communication made or directed at investment professionals, meaning authorised and exempt persons, persons carrying on the controlled activity as their ordinary business, local and national governments, and international organisations. This is subject to detailed requirements (FPO Article 19).

11. (p. 354) k.  A non-RTC written by a journalist in a periodical or broadcast. The principal purpose of the medium must not be to give regulated advice, nor to lead people to conduct regulated activities, and (if concerning specific equities or derivatives and except in certain cases) the journalist must disclose any interest in the subject matter (FPO Article 20). This is relevant where for example a journalist recommends an investment firm such as a fund manager, or tips a specific share.

12. l.  A company director or employee who promotes his company’s or group’s equities or derivatives (or any investment issued by an authorised person in its group) in the course of a broadcast or an exchange of e-mails that is not part of an organised marketing campaign (FPO Article 20A).

13. m.  Incoming e-commerce communications, other than a UCITS operator advertising units; an invitation or inducement to enter into a contract of insurance with an authorised EEA insurer; or an unsolicited e-mail communication (FPO Article 20B).

10.37  The following exemptions apply to accepting deposits and non-qualifying insurance.

1. a.  Accepting deposits: a non-RTC (subject to detailed conditions) (FPO Article 22) and an RTC (FPO Article 23).

2. b.  Effecting or carrying out a non-qualifying contract of insurance: a non-RTC (subject to detailed conditions) (FPO Article 24) and an RTC (FPO Article 26). These exemptions do not apply to most long-term insurance contracts.

3. c.  Reinsurance and large risks: a non-RTC (subject to detailed conditions) (FPO Article 25).

10.38  An ‘overseas communicator’ is a person who performs a regulated activity (other than accepting deposits, effecting or carrying out a contract of insurance, advising on syndicate participation at Lloyd’s, providing an FPC, RHRP, HPP, or RSRBA) from outside the UK, and not from permanent place of business it maintains in the UK (see section 2.21). It may make:

1. a.  A solicited RTC from outside the UK in course of carrying on its non-UK business (FPO Article 30). For example, a UK customer may call a Japanese insurer without solicitation or in response to a promotion approved by a UK firm.

2. b.  A non-RTC/unsolicited RTC to certain existing customers (FPO Articles 31 to 32).

3. c.  An unsolicited RTC to a recipient reasonably believed to be sufficiently knowledgeable to understand the relevant risks and to whom the overseas person has previously given risk warnings which the recipient has accepted (FPO Article 33).

10.39  The FCA (but not the PRA) has made detailed rules governing financial promotions issued or approved by firms, which are contained in COBS 4 and which apply to when a firm communicates or approves a financial promotion, and also in relation to its client communications that relate to designated investment business. There are multiple variants of applicability of the rules in COBS 4 depending on the type of product and class of recipient, whether the business falls within MiFID and whether it benefits from specific categories of exemption, so in every instance reference should be made to the current text since what follows is a summary alone of the some of the key aspects.

10.40  The FCA recognises that consumers are subjected to a multitude of advertising messages, so firms have to differentiate themselves to attract consumers’ attention and encourage them to buy their products, and has no policy to stifle innovation or restrict competition. It nonetheless views financial promotions as a particular risk area for consumers; advertising plays an important and influential role in how consumers make decisions and, because they may not have a sufficiently complete understanding of products and their risks, they may be misled. As stated in a disciplinary Final Notice: ‘Powerful messages are left by advertising, and from a perspective of consumer protection and fair competition between firms, it is important that consumers’ expectations are met by reality.’²⁵ The FCA is constrained by MiFID’s approach of using broad principles rather than detailed rules, and it therefore places great emphasis on requiring firms to have adequate systems and controls to ensure that financial promotions are compliant. Its predecessor the FSA articulated its requirement for financial promotions through a series of guidance consultations and speeches, and (p. 359) these continue to reflect the stance of the FCA. The key elements of this are, together with the need for systems and controls (section 10.55).

1. a.  The promotion clearly describes the nature of the product or service, including the commitment required on the part of the customer and reflects what the product or service can deliver.

2. b.  The information and its presentation is appropriate for the target audience so the consumer is likely to understand the product or service and what it is intended to achieve.

3. c.  The promotion provides a fair and balanced picture of what the product or service can deliver and there is no misleading headline claim. Both the benefits and drawbacks of a product are balanced through equally prominent feature statements.

4. d.  Important information, statements or warnings are shown using clear and bold type styles across neutral backgrounds. The size is proportionate in the context of the promotional material as a whole. Risk warnings are clearly stated within the main body of the advertisement and ahead of the ‘small print’.²⁶

10.41  The rules and guidance in COBS 4 apply when a firm communicates with a client in relation to its designated investment business, and when it communicates or approves a financial promotion other than those relating to non-investment insurance and certain credit products (COBS 4.1). The overriding requirement of COBS 4.1 reflects the wording of PRIN 7 and is that a financial promotion must be fair, clear, and not misleading, with the detailed requirements of COBS 4 to be applied appropriately and proportionately in accordance with the subject matter and target. A firm that has taken reasonable steps to ensure that the financial or promotion complies with the fair, clear, and not misleading rule has a defence to an action for damages brought under section 138D FSMA (COBS 4.2.6). This overriding requirement applies to (in summary):

1. a.  a communication that a firm makes to a client in the course of its designated investment business other than a prospectus prepared under the Prospectus Directive where it is not responsible for the contents;

2. b.  a financial promotion that the firm communicates other than

   1. i.  an excluded communication, meaning:

      • –  one falling within the FPO;

      • –  one originating outside, and incapable of having an effect within, the UK;

      • –  a financial promotion made from overseas that would fall within the FPO overseas communicators exclusion if it were made by a separate legal person;

      • –  a one off financial promotion that is not a cold call;

      • –  a financial promotion falling within the Takeover Code or its EU equivalent;

      • –  a personal illustration or quotation;

      • –  a financial promotion exempted by the Promotion of CIS Exemption Order;²⁷

   2. ii.  a non-retail communication—one made to or directed at professional clients or eligible counterparties; and

   3. iii.  a third party prospectus (as in a.); and

3. c.  a third party financial promotion approved by the firm (COBS 4.2).

(p. 360) 10.42  The overriding requirement is that all financial promotions are clear, fair, and not misleading, which also reflects the MiFID requirement that marketing communications should fulfil this criterion. FCA Principle 7, which is directly relevant to financial promotions, states that a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair, and not misleading. There are three elements to ‘clear, fair and not misleading’:

1. 1.  it must be clear in the sense of being easily understood by its target market;

2. 2.  it must be fair by presenting its contents appropriately and in a balanced manner; and

3. 3.  it must not mislead by creating an incorrect impression.

10.43  Each item of the promotion must meet those criteria and the overall impression of the promotion must fulfil each criterion; a statement can be literally true but nonetheless be used in a way that results in the promotion in which it appears creating a misleading impression. It is important that a promotion is comprehensible to the target market; the more complex the structure and features of a product or service, the more difficult it is to explain in a financial promotion without risk of consumer misunderstanding. The FCA has taken action against firms for breach of PRIN 7, COBS 4, or both in relation to issuing misleading marketing material, for making misleading statements during a sales process, and also for providing inaccurate information in other circumstances. It will be noted that the categories of clear, fair, and not misleading overlap, and that the requirement to comply with PRIN 7 extends beyond promotional material—see category c.:

1. a.  Issuing a misleading financial promotion—issuing marketing material for a product that diminished risks and made misleading comparisons;²⁸ stating that a product was wholly invested in cash when it was not;²⁹ misdescribing an unregulated collective investment scheme as low risk;³⁰ selling shares in companies without disclosing they had ceased to trade, made a loss, or had significant liabilities;³¹ implying that a portfolio service was bespoke when it was not.³²

2. b.  Misdescribing a product—failing accurately to explain the availability of insurance cover and over-emphasising benefits;³³ failing to disclose policy exclusions and limitations;³⁴ failing to explain the price and coverage of insurance policies;³⁵ selling a fund without mentioning that it required an overseas licence to operate;³⁶ a leaflet for travel insurance used an image of unattended personal belongings that the policy did not cover.³⁷

3. c.  Failing to provide accurate information—issuing a misleading decision letter in relation to mortgage endowment complaints;³⁸ providing unclear information about the (p. 361) availability of FSCS coverage;³⁹ introducing leverage into funds without explaining the risks to investors;⁴⁰ deliberately misrepresenting charges.⁴¹

10.44  Two further cases illustrate the breadth of PRIN 7 and COBS 4:

1. a.  Unsuited to the target market—a firm offered a retail structured product that provided a guaranteed minimum return with the potential for more if the FTSE 100 Index performed consistently well. The product brochure stated, correctly, that this was subject to a cap of between 20% and 72%, although the firm knew that there was almost no chance of achieving the maximum return and a 40% to 50% chance of a customer only receiving the guaranteed minimum return. The product brochures highlighted the potential maximum return as a key promotional feature, and this resulted in an unfair presentation of the overall likely return. Only a customer with a high level of sophistication and experience would have understood the low likelihood of achieving anything above the minimum return, and the target retail customers were unlikely to have this understanding.⁴²

2. b.  Misleading purpose—A firm approved an unauthorised overseas company’s financial promotions for companies listed on the United States NASDAQ OTC Bulletin Board. The overseas company wrote to UK investors offering a free research report about a listed UK company in which the investors already held shares but, if an investor responded, the overseas company telephoned them and sought to sell high risk illiquid shares in OTC Bulletin Board companies. This, and not the provision of a research report, was the true purpose of the promotion, which was therefore misleading since investors did not expect to be subject to pressure to buy unrelated shares. Since the firm knew that this was the purpose of the promotion, it had failed to take reasonable steps to ensure that the promotion was clear, fair, and not misleading as required by what is now COBS 4.2.⁴³

10.45  It is important that each financial promotion is what is termed stand-alone compliant; it must be compliant on its own and reference cannot be made to some other element in the sales process to correct a deficiency or remedy an omission. A defective promotion is not viewed as acceptably compliant just because it is far removed from a purchase decision, followed by other promotions or disclosures, or because any resulting sale is made following personal discussion with a customer adviser. Where a misleading promotion is issued, the fact that an accurate description of the product will be provided in material made available later in the sales process, or during a subsequent face-to-face sale, does not prevent the original promotion from being non-compliant.⁴⁴ There is no need for the FCA to establish detriment, nor for each element of ‘clear, fair and not misleading’ to be absent, in order for the FCA to bring enforcement action for breach of PRIN 7.⁴⁵

(p. 362) 10.46  A further consideration is that a misleading oral statement is unlikely to be corrected by the subsequent provision of written material.⁴⁶

10.47  When providing information relating to its designated investment business to, or communicating or approving a financial promotion aimed at, a retail client a firm must generally, taking into account the nature of the service or product, its risks, the likely information needs of the average recipient, the client’s commitment and the role of the information in the sales process (subject to the main exclusions of image advertising and a third party prospectus) ensure that it:

1. a.  names the firm;

2. b.  is accurate;

3. c.  does not emphasize benefits without a fair and prominent risk indication;

4. d.  is likely to be understood by the average intended recipient;

5. e.  does not disguise, diminish, or obscure important items or warnings;

6. f.  does not omit any material information;

7. g.  ensures that any comparison of business, investments, or providers is fair and balanced with sources specified and assumptions stated;

8. h.  states prominently that any reference to tax treatment depends on individual circumstances and may change.

Also, information contained in a financial promotion must be consistent with information the firm provides to a retail client when carrying on its designated investment business (COBS 4.5).