Recent reforms to tighten up the financial promotions regime came into effect on 7 February 2024. The changes are designed to strengthen the Financial Conduct Authority’s oversight of approvals and improve the standard of financial promotions for investors. The reforms also changed the exemptions for high-net-worth individuals (HNWI) and self-certified sophisticated investors, but the government reversed some of these changes on 27 March 2024.
Communicating a financial promotion in breach of the FCA rules is a criminal offence punishable by up to 2 years imprisonment and/or an unlimited fine.
Our financial services solicitors are experts in the UK regime for financial promotions. Read on to find out what the changes mean for your financial promotions and contact our team if you require any further information or advice.
Contents:
- What are financial promotions and who is allowed to issue them?
- What has changed (again) for high-net worth individuals and sophisticated investors and why?
- What should you do about financial promotions that were set up prior to the changes?
- What are the implications if you offer financial promotions that do not comply?
- Summary
What are financial promotions and who is allowed to issue them?
Financial promotions are communications that invite or induce investors to enter into an agreement to engage in investment activity, for particular financial products, and are regulated under the Financial Services and Markets Act 2000 (FSMA) by the Financial Conduct Authority (FCA). They can be any form of marketing such as advertisements, brochures, and websites.
Prior to 7 February 2024 any FCA authorised person was able to approve financial promotions for an unauthorised person. The regulatory gateway introduced on 7 February 2024 requires any firm that wants to approve financial promotions to apply to the FCA for permission to do so, unless one of the following exemptions applies:
- A firm is approving their own promotions, including for communication by an unauthorised person.
- The financial promotion is produced by an unauthorised person within the same corporate group as the authorised person that approves the communication.
- The financial promotion is prepared by an appointed representative and relates to a regulated activity for which the authorised person has agreed to accept responsibility.
The FCA will assess firms to determine whether they have the necessary competence and expertise to effectively evaluate whether promotions comply with FCA rules before giving them approver status. Firms given permission to approve financial promotions are required to submit a bi-annual report to the FCA detailing amongst other things the number of approvals made, the revenue from approval activity and the number of investor complaints relating to the approved promotions, to enable the FCA to monitor the approvals market.
What has changed (again) for high-net worth individuals and sophisticated investors and why?
Two of the exemptions provided by the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 relate to HNWI and self-certified sophisticated investors. These exemptions allow an unauthorised firm to communicate financial promotions for certain types of investments to investors that satisfy the criteria for either of the exemptions to apply.
Firms can continue to rely on the exemptions; however, on 31 January 2024, the government introduced more stringent requirements for self-classification to amend the criteria for HNWI and self-certified sophisticated investors. The government implemented these changes to address the apparent misuse of the exemptions and to reflect the fact that the investment landscape has changed since 2005. Subsequently, due to industry pressure and the negative impact of the changed exemptions on start-ups, early-stage companies and venture capital funds, as well as commentary that women would be disproportionately affected by the changes, the government reversed the exemption threshold increases from 27 March 2024. The government has also pledged to carry out further work to review the scope of the exemptions.
The key changes are:
- HNWI financial/qualifying threshold: The financial threshold to be able to rely on the HNWI exemption increased on 31 January 2024 (from at least £100,000 income or at least £250,000 net assets) to at least £170,000 income or at least £430,000 net assets throughout the last financial year. With effect from 27 March 2024, the financial threshold to be able to rely on the HNWI exemption reverts to at least £100,000 income or at least £250,000 net assets throughout the last financial year.
- Self-certified sophisticated investor criteria: Further amendments to this exemption include a reversion in the turnover amount of a company of which the individual is a director from £1.6 million back to £1 million; and the reinstatement of the criteria for the individual having made two or more investments in an unlisted company in the 2 years prior to the date of the self-certification statement.
- Responsibility on firms providing financial promotions: There is an obligation on firms to ensure they have reasonable grounds to believe that the recipients of their financial promotions meet the relevant criteria and for the ongoing monitoring of financial promotions. A firm needs to also consider their responsibilities under the Consumer Duty and particularly the ‘consumer understanding’ outcome when approving financial promotions for unauthorised persons.
- Disclosure required by firms: For prospective investors to be able to undertake due diligence, there is a requirement for firms to provide details about themselves in any communications made using the exemptions, including company address, contact information and registration details.
- HNWI and self-certified sophisticated investor statements: The following changes are being made to the investor statements to increase investor engagement:
- Format update – The conditions to be considered a HNWI or self-certified sophisticated investor have been made more prominent by moving it from the bottom of the investor statement to the top, improving the overall format of the statement.
- Language simplification – The language in the investor statement has been simplified to provide more consumer-friendly explanations and removes references to other financial services legislation.
- Investor engagement requirement – The prospective investor will be required to select the specific criterion they meet to be classified as a HNWI or self-certified sophisticated investor and state how they meet the relevant criterion. The expectation is that prospective investors will be required to engage more actively with the content of the investor statement before signing it.
What should you do about financial promotions that were set up prior to the changes?
There is no transitional period in relation to these reforms. If you made a financial promotion to a potential investor prior to 31 January 2024 in compliance with the exemptions, you will be able to continue to engage with the investor with follow-up communications in relation to that financial promotion within 12 months of the first communication, without the need to obtain an updated financial statement.
The previous thresholds for HNWI and Self-certified sophisticated investors only came into effect on 31 January 2024 and there will be a transitional period until 31 January 2025 where statements made based on these previous thresholds will remain compatible with the exemptions.
What are the implications if you offer financial promotions that do not comply?
As noted above, communicating a financial promotion in breach of the FCA rules is a criminal offence punishable by 2 years imprisonment and/or an unlimited fine. Where a financial promotion does not comply with the requirements, the FCA can:
- Ask the firm that approved the promotion to ensure that it is changed or withdrawn.
- Direct the firm to withdraw its approval of the financial promotion.
- Vary or cancel the firm’s permission to approve financial promotions.
- Open an enforcement investigation which may lead to enforcement action such as financial penalty for serious misconduct.
Summary
Prior to the changes, unauthorised firms could have promotions approved by any authorised firm, even where the authorised firm did not have any expertise in the area being promoted. This resulted in some non-compliant promotions being approved and communicated, leading to investors being marketed products without the proper regulatory protections afforded by the financial promotions regime.
The new Financial Promotions Gateway aims to enhance the quality of financial promotions from unauthorised firms by permitting only authorised firms, assessed as suitable and possessing adequate expertise, to approve promotions.
Unauthorised firms should ensure they are complying with the updated regime by:
- Checking that relevant promotions meet the criteria for HNWI or self-certified sophisticated investors, where applicable;
- Ensuring that financial promotions records are maintained and that the appropriate investor statements are being relied on; and
- Ensuring that training is provided so that staff are aware of the increased responsibilities on firms when providing financial promotions and can comply with the requirements.
