A confluence of recent and upcoming changes in regulation represent a step-change in the UK environment for the communication financial promotions (broadly, the marketing of financial services and products).
Against the backdrop of strengthened rules for firms communicating or approving financial promotions for “high-risk investments”, in force from 1 February 2023, three recent and upcoming changes will result in significantly more restrictive rules in terms of the scope of the financial promotions regime from 2024 onwards.
FPO exemptions toughened
The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) comprises a number of exemptions from the statutory restriction on financial promotions contained in section 21 of the Financial Services and Markets Act 2000 (FSMA). In practice, these enable unauthorised individuals or businesses to communicate financial promotions without requiring the approval of an FCA/PRA authorised firm.
- Certified high net worth individuals (Article 48, FPO)
- Sophisticated investors (Article 50, FPO)
- Self-certified sophisticated investors (Article 50A, FPO)
These exemptions were introduced in 2001 and then expanded and updated in 2005. They are designed to enable small and medium sized enterprises (SMEs) to raise finance from high-net-worth individuals and sophisticated private investors, or ‘business angels’, without the cost of having to comply with the financial promotions regime.
The amendments to the FPO include:
- Promotions to high net worth individuals in article 48: increasing the thresholds to be eligible for the high net worth individual exemption in article 48 in line with inflation. The income and net assets thresholds are being increased to £170,000 (previously £100,000) and £430,000 (previously £250,000) respectively.
- Amending the eligibility criteria for the self-certificated sophisticated investor exemption in article 50A: removal of the criterion of having made more than one investment in an unlisted company in the previous two years (to reflect the government’s view that the criterion is no longer a suitable indicator of investor sophistication); and increasing the company turnover required to satisfy the ‘company director’ criterion to £1.6 million (from £1m).
- Changing the statements required to rely on the high net worth individuals and self-certified sophisticated investor exemptions: the format of high net worth individual and self-certified sophisticated investor statements has been simplified. The statements will also require greater investor engagement as the individual or prospective investor will be required to select which specific criterion they meet to be classified as “high net worth” or “sophisticated” and state how they meet the relevant criterion giving detail about their income/assets. Companies will also be required to provide identification details in any communications made using the exemptions.
These changes will also be applied to the equivalent exemptions for the promotion of collective investment schemes. The changes will be implemented through a statutory instrument, and it is expected that they will enter into force on 31 January 2024.
Where a business has made a financial promotion to an individual before 31 January 2024, in compliance with these exemptions, that business will be able to continue to engage with the relevant individual in relation to the financial promotion made for a period of up to 12 months from when the financial promotion was made (subject to meeting the requirements of article 14 FPO) and will not be required to request an updated investor statement.
New financial promotions made from 31 January 2024, even if made to individuals already promoted to under the current exemptions, will need to be made in accordance with the updated exemptions.
Financial promotions regulatory gateway
The government is introducing a financial promotions ‘gateway’, legislated for in the Financial Services and Markets Act 2023, which will require any authorised firm wishing to approve financial promotions of an unauthorised firm to first obtain permission from the FCA (unless an exemption applies, e.g., for intra-group approvals; for firms approving their own promotions for communication by unauthorised persons; and for firms approving communications for their appointed representatives).
In cases where exemptions in the FPO are being used to make financial promotions, the gateway does not apply given the absence of the need for approval of the financial promotion.
The gateway aims to improve the quality of financial promotions communicated by unauthorised firms, by allowing only those authorised firms that the FCA assesses as suitable and with sufficient expertise in the product or service to which the promotion relates to approve the promotions of unauthorised firms. The FCA’s particular target areas where it anticipates the greatest impact from the new rules are investment-based crowd-funding, minibonds, cryptoassets and buy-now-pay-later agreements. The FCA imposes exacting rules for the gateway firm to undertake appropriate due diligence (including where appropriateness / suitability assessments are required); conduct ongoing monitoring of promotions; and report to the FCA.
There remain uncertainties as to the practical application of the gateway. For example, where a fund manager wishes to approve promotions relating to a fund that it manages that will presumably fall within the exemption for the promotion of its own business. Further, it remains to be seen whether the expected reduction in the number of firms able to approve financial promotions will prohibitively increase the cost of approvals.
The FCA opened applications to the gateway on 6 November 2023. The requirement to have gone through the gateway before approving financial promotions made by unauthorised firms will then apply from 7 February 2024. Where an authorised firm has applied to the FCA for permission to approve promotions before 7 February 2024, a transitional regime will enable the firm to continue approving financial promotions until its application has been determined by the FCA.
In October 2023, the government extended the financial promotions regime to promotions of qualifying cryptoassets (as “Restricted Mass Market Investments”). In consequence, the following are the only routes to lawfully communicate such promotions to UK consumers:
- The promotion is communicated by an FCA/PRA authorised person
- The promotion is approved by an authorised person (subject to the new financial promotions regulatory gateway)
- The promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) but which is not an authorised person
- The promotion otherwise complies with the conditions of an exemption in FPO.
There are very few FPO exemptions that will be appropriate for cryptoasset promotions. This means that many communicators/advertisers of cryptoassets would fall back on a third party approver now subject to the financial promotions regulatory gateway.
A particular issue with the gateway, in connection with cryptoassets, is that the FCA expects a gateway approver to have relevant “competence and expertise” in relation to the investment types to be assessed at the gateway. Very few firms are expected to meet these requirements and be able to approve cryptoasset marketing.