Marketing in a brave new world

January 2014

Gillian Roche-Saunders, David Aylward and Ashley Kovas

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Contents

• Overview of the promotions regime

• New NMPI rules

• New AIFMD rules

• Proposed direct offer financial promotion rules

• Approach with social media.

A financial promotion can only be communicated

• by an authorised person or

• where the contents are approved by an authorised person.

The financial promotion must also meet certain rules which are

set out in the FCA Handbook (COBS).

There are alternative routes set out in statutory instruments:

• Promotion of CIS (Exemption) Order

• Financial Promotions Order.

.

The current regime

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“Any invitation or inducement to engage in investment activity when

communicated in the course of business.” (s21 FSMA)

Non-mainstream pooled investments

For units in UCIS the statutory restriction in FSMA (s238) still

applies:

An authorised person must not communicate an invitation or

inducement to participate in a collective investment scheme.

For units in a UCIS (for an authorised firm) consider using:

• Promotion of CIS Order (PCIS)

• New COBS 4.12 exemptions.

For units in a UCIS (for an unauthorised person) consider using:

• Financial Promotion Order (FPO).

For a non-mainstream pooled investment (other than a UCIS) consider:

• Financial Promotion Order (FPO)

• New COBS 4.12 exemptions.

Restricting UCIS promotions

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Non-mainstream pooled investment: • Unit in an unregulated collective investment scheme

• Unit in a Qualified Investor Scheme

• Security issued by an SPV*

• Traded life policy investment

• Rights to or interests in the above.

Exclusions • *SPV exclusions (including VCTs, Investment trusts etc)

• EIS and SEIS funds that are not UCIS are outside scope.

Extending the restriction

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“A firm must not communicate or approve an invitation or inducement

to participate in, acquire, or underwrite a non-mainstream pooled

investment where that invitation or inducement is addressed to or

disseminated in such a way that it is likely to be received by a retail

client.” (COBS 4.12)

Key trade offs

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Lost Gained

Advised sales

Previously used by firms to promote

the schemes where advice was

also provided

2 tiers of retail

Ordinary retail clients

vs.

Certified high net worth investors

Certified sophisticated investors

Self-certified sophisticated investor

Existing participants

Now only when the NMPI is closing

and the scheme promoted is

intended to absorb the assets

Capability assessment

Where the firm assessed the

investors expertise, experience

and knowledge

Some differences between 3 certified routes under COBS & PCIS

• Certified high net worth investor

and

• Self-certified sophisticated investor - Must do a ‘preliminary assessment’ that investment is likely

to be suitable for that client, based on the client’s profile and

objectives.

• Certified sophisticated investor - can promote any non-mainstream pooled investment

- does not need third party firm to sign certificate.

COBS certification routes

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Increased emphasis on client’s best interest rules and the

Principles. Applies to FPO, PCIS Order and COBS 4.12.

• Certified high net worth investor - take reasonable steps to ascertain that the client does meet

the the income and net assets criteria

- check that the promotion is in the interests of the client

and that it is fair to communicate it to them it.

• Self-certified sophisticated investor - satisfy itself that client has the requisite experience,

knowledge or expertise to understand the risks

- check that the promotion is in the interests of the client

and that it is fair to communicate it to them it.

• Certified sophisticated investor - check that fair and reasonably assessed as a

sophisticated investor in light of complexity of NMPIs.

All certification routes

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• CF10 – or an employee that reports to and is supervised by

them – must make a record certifying that a financial

promotion for a NMPI complies.

• If an employee is used, the CF10 must have reviewed and

approved the process for certification of compliance within

the last 12 months.

• The record must state which exemption was used and why

it applied, and make a record of any relevant certificates,

investor statements and warnings or indications required by

the exemption.

Sign off and record-keeping

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Before purchasing a NMPI in a discretionary management

arrangement, the DIM should “have regard to” whether that

product could have been promoted to the client (even though

the purchase itself does not involve a promotion).

If it could not, the DIM should “exercise particular care” to

satisfy himself that the transaction is suitable for the client and

in the client’s best interests.

Discretionary investment management

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Further consultations may follow:

• Widening the net of NMPI

• Adjusting the monetary limits for high net worth

certification

“That is not to say that we necessarily believe that the

products no longer falling within scope of the marketing

restriction should be marketed to all types of retail investors or

that they are generally suitable for all retail investors.”

Future developments

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Further developments are likely in due course.

Right now, firms should:

1. Ensure you are only promoting the right products to the

right people.

2. Ensure you can sufficiently demonstrate that exemptions

are used correctly.

3. Ensure that you have robust procedures in place for

compliance sign off.

Firms may need to ensure that they have sufficient oversight of

their distribution networks.

Points to take away

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Marketing under AIFMD

(Alternative Investment Fund Manager Directive)

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• Investment at investor’s “own initiative” does not count

• FCA’s current view is AIFMD marketing does not include

marketing using draft documentation

• Marketing restrictions depend on:

- location of the AIF (fund)

- location of the AIFM (manager)

- is the AIFM above or below threshold?

AIFMD Marketing vs Financial Promotions

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“A direct or indirect offering or placement at the initiative of the AIFM

or on behalf of the AIFM of units or shares of an AIF it manages to or

with investors domiciled or with a registered office in the Union” (AIFMD, Article 4 (1)(x))

Full scope: where the AIFM holds assets under management

above a certain threshold or has opted in to the full regime.

• AIFMD passport available to enable marketing to

“professional investors” within EEA

• Detailed rules control contents of marketing material

• Restrictions beyond that – eg to retail, HNWI, or non-EEA

countries – up to individual countries

• Three stages of marketing controls in the Directive (2013-

2015, 2015-2018, 2018 onwards).

Rules for full-scope marketing

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Sub-threshold: where the AIFM’s assets under management

are below the relevant threshold and manager did not opt in to

full regime.

• AIFMD passport is not generally available

• Entirely reliant on rules and restrictions in country

marketing in each country – the private placement regime

• Assuming UK-based firm, marketing an AIF in UK little has

changed. Most AIFs, but not necessarily all, will be NMPIs.

• EuVECA and EuSEF – passport is available.

Rules for sub-threshold marketing

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Direct Offer Financial Promotion

A financial promotion that specifies or provides the means of

responding.

Currently, when issuing, firms must include specified

information about

• the firm

• its services

• the investment(s) offered.

Further additional information, depending on whether the

direct offer relates to MiFID or non-MiFID business.

Propose to limit further who a DOFP can be sent to in relation

to unlisted equity or debt…

Direct Offer Financial Promotion

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Retail clients can only receive such a DOFP for unlisted debt

or equity if they meet certain categories:

1. ‘Restricted investor’ certification Certify will only invest 10% of net investible portfolio in unlisted

debt and equity in 12 months

2. Advisory or discretionary management service

3. NMPI certification routes (HNWI or sophisticated investor)

Appropriateness test is required.

Restriction does not apply to venture capital contact or a corporate

finance contact.

Proposed restriction

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Social Media

A way for firms to raise profile, engage with customers,

gain trust and develop reputation.

Financial promotion rules affect all mediums of

communication.

• Having opinions vs. giving advice or recommendations

• Updating regularly vs. compliance sign off

• Interacting with others vs. appropriate for general public

Social Media

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Things to consider:

• Online presence makes you more visible

• Ability for viewers to share beyond intended audience

• Employees use of own social media accounts

• Compliance resource for instantaneous responses

and regular updates

Remember all social media communications, whether promotions

or not, must meet the fair, clear and not misleading tests.

Understanding the risks

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Standalone compliance risk

• partial information

• risk warnings

• balance

• jargon.

The Twitter Challenge

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"If you can't make the promotion compliant within the allocated

space, you can't advertise“ Clive Gordon, Head of Conduct Risk, FCA

Five first steps

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1. Agree and communicate your firm policy

2. Raise awareness of financial promotions rules

3. Regular online sweeps to check information is up to date

4. Ensure promotions are standalone

5. Consider combining media

Round up

Don’t forget

• all communications must be fair, clear and not misleading.

• product providers and distributors responsible for making

sure promotions end up in the right hands.

Operating in the current regime

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• What are you marketing?

• e.g. equities, NMPI, AIFs What?

• Who are you marketing to?

• e.g. retail, certification routes Who?

• How are you communicating?

• e.g. Twitter, direct offer How?

Questions?

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