FCA outlines plans for the introduction of a regulatory gateway for firms which approve financial promotions

Background

Under section 21 of FSMA, currently any firm that is authorised under the Financial Services and Markets Act 2000 (FSMA), may approve a financial promotion by another unauthorised person. However, the government is concerned that the current framework is no longer sufficient and gives rise to risks. The FCA is particularly concerned with the promotion of high-risk investments and ‘Buy-Now Pay Later’ (BNPL) products. The FCA has seen examples of promotions that do not warn consumers of the risks, such as the taking on of debt, missed payments and other consequences. The FCA has also identified cases where firms are approving financial promotions for products which are unrelated to the firm’s permission and expertise.

As such, the regulatory gateway has been proposed, and is intended to enable the FCA to assess firms’ suitability and competence, including whether firms have the necessary expertise to approve financial promotions. The FCA considers that its proposals will help support the approach of the new Consumer Duty to ensure that the financial promotions that firms approve support retail consumers’ understanding of the products/services that they are purchasing.

Financial Promotion Requirement (FPR)

The proposed regulatory gateway will impose the new ‘Financial Promotion Requirement’ on all existing and newly authorised firms. Only firms that apply for the ‘gateway permission’ and receive approval will be able to approve financial promotions from unauthorised persons. Consequently, an unauthorised person will only be able to communicate financial promotions approved by a firm with gateway permission or where it is able to rely on an exemption.

Exemptions

Based on HM Treasury’s consultation response, the expectation is that firms wishing to approve financial promotions will be exempt from the requirement to apply for the regulatory gateway permission in the following circumstances:

• firms approving financial promotions of unauthorised entities in their corporate group;
• firms approving financial promotions for the firm’s appointed representatives in respect of the business for which the principal firm has accepted responsibility; and
• firms approving their own financial promotions for onward communication by an unauthorised person.

Unauthorised persons can continue to communicate financial promotions without the approval of an authorised firm where they are able to rely on existing exemptions such as those relating to ‘high net worth individuals’ and ‘self-certified sophisticated investors’. However, the government has recently consulted on proposed reforms to these exemptions which, if legislated upon, may lead to an increase for approvals by authorised firms.

Transitional Period

A transitional period will begin once the initial application period has ended to allow for an easier transition between the old and new regime. Firms that apply for a gateway permission during the initial application period will be able to keep approving financial promotions while their gateway application is being assessed by the FCA. The transitional period will end on a firm-by-firm basis on the determination of the firm’s gateway application.

If a firm applies for gateway permission after the initial application period, it will no longer be able to approve financial promotions (other than within an exemption) until its application is determined. It will not be subject to the transitional period described above.

The key points

CP22/27 goes into extensive detail with respect to how the FCA will operationalise the regulatory gateway. The key points from CP 22/27 are as follows:

Assessment of applicants at the regulatory gateway

Firms will need to apply to the FCA for a gateway permission under either (a) a variation of their existing permission or (b) as part of their application for authorisation. The FCA will assess applications by reference to its operational objectives and the Threshold Conditions set out under FSMA. In summary, firms will need to demonstrate that:

• they have considered the commercial viability of the product/service described in the financial promotion they approve;
• they have assessed if there are any fees, commissions and other charges within the investment’s structure that could materially impact the ability of the product provider to deliver what has been advertised;
• they employ individuals with sufficient competence and expertise to approve financial promotions which should relate to investment types broadly within the firm’s existing Part 4A permission;
• they have the necessary systems, controls and processes in place to ensure the financial promotion is fully compliant with FCA rules, including the ability for ongoing monitoring, amendment and withdrawal of an approved financial promotion; and
• they have adequate procedures relating to the record keeping of the financial promotions that they approve.

A firm’s gateway application must detail the type of financial promotion it is seeking to approve, such as whether it is relating to designated investment business, general insurance business, retail banking services, or consumer credit. If the type of financial promotion sought differs from the firm’s Part 4A permission then the firm’s gateway application will be subject to more scrutiny from the FCA.

In assessing a firm’s gateway application, the FCA will give consideration to a number of factors such as the information provided by the applicant, market research, complaints data and FCA’s own experience in supervising the applicant firm. Firms applying for gateway permission are therefore encouraged to consider the FCA’s guidance for approving financial promotions before applying.

FCA basis for granting or refusing gateway applications

The FCA will reject a gateway application to advance one or more of its operational objectives. However, the FCA may grant an application for gateway permission on different terms than set out in the application or in relation to a narrower range of investment types of financial promotions.

If a firm’s gateway application is refused, it will be able to make its representations and ultimately refer the matter to the Upper Tribunal.

A firm’s gateway permission, once approved, can be varied or cancelled by the FCA, either through a voluntary application of the firm or the FCA’s own-initiative powers.

Notifications to the FCA on approval, amendment, and withdrawal of financial promotions

A firm with gateway permission will be required to notify the FCA each time the firm:

• approves a financial promotion stating the product name, product type, the name of the unauthorised firm whose product is the subject of the financial promotion;
• withdraws a financial promotion confirming the date of withdrawal, the communication channels that were used for the financial promotion and the reasons for the withdrawal; and
• materially amends a financial promotion providing information on the reason for the amendment, in particular whether the amendment was made in response to concerns over the promotion or due to a change to the product.

The above data together with other information the FCA will collect will help the regulator monitor approval activity and the standard of approvals as well as inform its supervisory approach.

Reporting requirements

Firms with gateway permission that are approving financial promotions will also be required to submit bi-annual reports to the FCA in respect of the:

• total number of approvals;
• total number of consumer complaints for approved financial promotions;
• revenue from approval activity; and
• total revenue from regulated and unregulated activities.

The first bi-annual report will need to be submitted within 30 business days following either a firm’s accounting reference date (ARD) or the date falling 6 months after the firm’s ARD, whichever date falls first after the transitional period expires. A firm that applies during the initial application period will be required to begin complying with the notification and reporting requirements when the transitional period has begun.

Compulsory jurisdiction of the Financial Ombudsman Service and compensation

At present, complaints about the approval of financial promotions are not covered by the Financial Ombudsmen Service (FOS), and the FCA has no plans to extend FOS’ compulsory jurisdiction to bring approval of financial promotions within its remit.

The Financial Services Compensation Scheme is also not available for redress for claims based on a complaint regarding the approval of a financial promotion.

Handbook guidance

The FCA has published an updated version of its guidance (PS22/10) on the rules for financial promotions, including the proposed changes to the Handbook outlined in CP22/27. The proposed Handbook guidance explains some practical implications on assessing financial promotions to ensure promotions comply with chapter 4 of the Conduct of Business Sourcebook.

Consumer Duty

A firm’s responsibility under the Consumer Duty will need to be considered during the process of approving financial promotions of unauthorised persons. Firms need to ensure each promotion:

• meets the information needs of customers;
• is likely to be understood by customers intended to receive them; and
• is capable of equipping customers to make effective decisions.

Financial promotions will also need to be tailored to consider characteristics such as a customer’s vulnerability or the product’s complexity.

Impact On Firms

The FCA’s proposals, together with the new rules on financial promotions of high-risk investments (see our summary here) represents a significant change from the current financial promotions regime. Unless authorised firms can rely on an exemption from the requirement for a gateway permission, authorised firms wishing to approve financial promotions of unauthorised persons must apply for a gateway permission and, once granted, undertake enhanced due diligence on each promotion and comply with ongoing reporting requirements.

These changes will result in higher compliance burden and take up additional resources. Firms will have to consider if and how they will be able to provide approval services to unauthorised persons going forward. Conversely, the number of firms providing approval services may drop and as such, demand for approval activities may rise for firms that are successful at the regulatory gateway. Any firms that are currently approving financial promotions should monitor developments to determine their next course of action.

Next Steps

The FCA consultation closes for comments on 07 February 2023. The FCA expects to publish the Policy Statement and final rules in the first half of 2023 although this will depend on the Financial Services and Markets Bill progressing through Parliament and receiving Royal Assent for which there is currently no specific timeline.

This article was first published in Thomson Reuters on 19 December 2022.

Article co-authored by Jude AlHajjaj