Not every customer communication relating to credit constitutes a financial promotion; we need to understand what the term ‘financial’ promotion means in the eyes of the FCA in order to be make this decision, as determining whether a communication is a financial promotion or not is vital in ensuring compliance with the FCA’s financial promotion rules in CONC 3: for example, the need to include a representative example and/or representative APR.
So, let’s start with their definition of a financial promotion.
Definition of a financial promotion
The FCA define a financial promotion in their Glossary as:“An invitation/inducement to engage in investment activity communicated in the course of business.”
Now we need to break this definition down into its constituent parts…
What is an ‘invitation’ or ‘inducement’?
This is made for difficult as FSMA 2000 does not offer any definition on the expressions ‘invitation’ or ‘inducement’, however, what we do know is that in the FCA’s view it’s appropriate, in interpreting the expressions, to take due account of the context in which they are being used and their purpose. Thankfully, we can use the FCA’s PERG 8.4 to help us with this.
In summary, PERG 8.4 notes that the Treasury stated its intention that only communications containing a degree of incitement would amount to ‘inducements’ and that communications of purely factual information would not. For example, referencing the interest rate on a customer-facing website within the terms and conditions section in a purely factual manner would not involve a degree of incitement and therefore there would be no requirement to include a representative example, as would otherwise be the case.
The FCA recognises that the matter cannot be without doubt but supports this ministerial view and provides an ‘objectivity test’ that can be used to assist us in determining whether a communication represents an ‘invitation’ or ‘inducement’. Under this test, in the FCA’s view the essential elements of an invitation or an inducement under FSMA 2000 is that it must both (i) have the purpose or intent of leading a person to engage in investment activity and (ii) be promotional in nature.
It follows that a communication which does not have any element of persuasion or incitement will not be an invitation or inducement under FSMA 2000 and would not therefore be considered a financial promotion by the FCA. For example, merely asking a person if they wish to enter into an agreement with no element of persuasion or incitement will not, in the FCA’s view, be an invitation or inducement and is not a financial promotion.
What is ‘investment activity’?
We need to be careful with our understanding of what the FCA means in terms of ‘investment activity’ in the context of a financial promotion, as under s.21(8) of FSMA 2000 it doesn’t just mean ‘investment’ in the widely understood sense of investing money for a period of time in the hope of realising future benefits; in the context of financial promotions it means entering into any of the ‘Controlled Activities’ as defined by FSMA 2000, which includes the likes of accepting deposits, effecting contracts of insurance, credit broking, consumer credit, consumer hire, debt adjusting, debt counselling and even providing funeral plan contracts!
So, this means that any time a communication contains an invitation or inducement, as per the test in section 1, and relates to any of the activities listed above, we are well on the way to concluding that the communication is a financial promotion. The final piece of the jigsaw is identifying whether the communication is being made ‘in the course of business’…
What does ‘in the course of business’ mean?
Again, we are able to turn to further guidance provided by the FCA here, this time in PERG 8.5. The FCA note that under FSMA 2000 the Treasury has the power to specify circumstances in which a person is viewed as ‘acting in the course of business’ or not but that it has not, to date, used its power in relation to defining this for financial promotions and so the FCA has provided their own view of this.
The FCA considers that, in relation to financial promotions, ‘in the course of business’ requires a commercial interest on the part of the communicator. This does not necessarily have to be a direct interest, nor does the communicator need to be carrying on regulated activities as or as part of their business.
The position is slightly more blurred with individuals. The ‘in the course of business’ test is intended to exclude genuine non-business communications. Examples of these would be friends talking in a pub, letters between family members or e-mails sent by individuals using an internet chat-room or bulletin board for personal reasons.
A couple of notable exceptions…
Aside from the consideration of the definition of a financial promotion, it is worth noting that the FCA’s financial promotion rules do not apply to customers outside of the UK or if the advert makes clear it is promoting products and services that are intended to be used solely for business purposes.
‘Financial promotion’ is an example of a phrase within the FCA Handbook that at first glance may appear straightforward. Without proper consideration, however, we run the risk of failing to correctly identify whether a communication actually constitutes a financial promotion or not in their eyes; remember: we need to be able to answer “yes” to all three parts of their definition in order for a communication to be considered a financial promotion.
If we do not assess each customer communication in this way, we run the risk of including the onward financial promotion requirements of CONC 3 in a customer communication where there is no need to or, worse still, breaching the FCA Handbook by failing to adhering to these rules where we are obliged to.
Robert Bell, Compliance Consultant at RB Compliance Consultancy Limited