On 22 June 2021, HM Treasury (“HMT”) published its response (the “Consultation Response”) to its earlier consultation (the “Consultation”) in July 2020, announcing changes to legislation and the regulatory framework for approving financial promotions for unauthorised persons.
Currently, authorised firms may approve the financial promotions that are made and communicated by unauthorised persons. However, the government had raised concerns relating to when an authorised firm provides this approval, particularly in relation to:
the lack of relevant expertise of the approving authorised firm;
the lack of due diligence carried out by the approving authorised firm; and
challenges in the FCA exercising appropriate regulatory oversight of the approving authorised firm.
Taking these concerns into account, HMT proposed to amend the Financial Services and Markets Act 2000 (“FSMA”) so that authorised firms can no longer approve financial promotions that are made and communicated by unauthorised persons, unless that authorised firm has passed through a new “regulatory gateway” operated by the Financial Conduct Authority (“FCA”).
2. Changes to current position
The government agreed with the majority of responses to its Consultation that a “gateway” should be introduced for the approval of financial promotions of unauthorised persons. This shall entail the following:
a new requirement on all authorised persons prohibiting them from approving financial promotions for unauthorised persons (the “Financial Promotion Requirement”);
an existing authorised person intending to approve financial promotions for unauthorised persons will need to apply to the FCA for a Variation of Requirement (“VREQ”) to have the Financial Promotion requirement varied or cancelled (HMT has indicated that permissions to approve financial promotions could be limited to a specific type or types of products or services dependent on the firm’s expertise);
a firm applying for authorisation will be able to include a VREQ in its application to have the Financial Promotion Requirement varied or cancelled; and
amending the exclusion from section 21 FSMA (restriction on financial promotions) by removing the general ability to communicate financial promotions which have been approved by authorised firms. Therefore authorised firms will only be able to approve financial promotions for unauthorised persons where they have had this requirement to not approve financial promotions varied or cancelled.
However, HMT has not provided any details on the application process, the requirements, timings, or any other requirements (e.g. conduct, record keeping, etc.) imposed upon firms which obtain a VREQ for these purposes. Therefore we would expect this additional detail to appear when the FCA consults on the changes to its rules as a result of these proposals at a later date.
3. Transitional Period
A transitional period (the dates for which have not yet been confirmed) will be put in place, consisting of three phases:
Application window – authorised firms that wish to continue to approve financial promotions for unauthorised persons must apply to the FCA do so during this application window. All firms may still approve financial promotions for unauthorised persons during this time.
Transitional period – firms which have applied during the application window may continue approving financial promotions whilst their applications are being decided. Firms which did not make an application will no longer be able to approve financial promotions for unauthorised persons.
New regime – the new regime will then commence. Only firms that have successfully applied to have the Financial Promotion Requirement cancelled or varied will be able to approve financial promotions for unauthorised persons.
Unauthorised persons will still be able to rely on the usual “exemptions” under the financial promotions regime. However, HMT has also proposed two additional specific exemptions in relation to the Financial Promotion Requirement. These exemptions relate to:
The government will also provide an exemption for principals approving financial promotions for their appointed representatives in relation to regulated activities for which the principal has agreed to accept responsibility. This exemption would mirror the scope of the exemption set out in Article 16(2) of the Financial Promotions Order.
5. Supervision and Enforcement
HMT has also indicated that the gateway will mean that the FCA will have a record of firms that are permitted to approve financial promotions, which will make it easier for the FCA to proactively supervise those promotions.
Further, HMT confirms the position that consumers who invest in a product as a result of an approved promotion will not automatically be covered by the Financial Services Compensation Scheme.
6. Next Steps
The government will now move to implement proposed legislation and the FCA will consult on its proposals for changes to the FCA rules to implement the above proposals. However, the government has not yet set out a clear timetable for either the proposed legislation or the consultation on new FCA rules.
Co-authored by Isabella Ramsay