Financial promotions - particularly those made by unauthorised persons - are in the regulatory spotlight. We have already highlighted the regulatory concerns around financial promotions to high net worth and sophisticated investors by unauthorised firms here. Another reason for the financial promotion regime coming under regulatory scrutiny is the shortcomings of the current financial promotion approval regime under FSMA, which allows authorised firms to approve unauthorised persons' financial promotions.
What is wrong with the current regime?
Currently, under s.21 FSMA any authorised firm can approve the financial promotions of an unauthorised firm, regardless of expertise or experience of the particular market. The competence of those authorised firms approving financial promotions currently does not have to be assessed. Financial promotions cover a broad range of financial products and services and there is no guarantee that the approving firm has relevant expertise or understanding of the product being promoted.
The FCA has also identified insufficient approver firm due diligence, for example approver firms not adequately assessing investment return claims in the promotions, or not scratching below the surface of the content of and claims in the promotion.
Furthermore, the FCA has no comprehensive regulatory oversight of which firms are approving which types of financial promotions and for whom.
How will things change?
The FSMA is to be amended so that only authorised firms which have passed through a new regulatory ‘gateway’ operated by the FCA will be able to approve the financial promotions of unauthorised persons.
A universal 'Financial Promotion Requirement' will be imposed on all new and existing authorised persons prohibiting them from approving the financial promotions of unauthorised persons. An existing authorised person wishing to approve financial promotions will have to apply to the FCA to have this requirement varied (allowing them to approve certain types of financial promotions) or cancelled (allowing them to approve all types of financial promotions).
Will there be a transitional period for implementing these changes?
Yes, a transitional period with three distinct phases will apply.
The first phase is an application window during which firms wishing to continue approving financial promotions can apply to the FCA to do so. Those firms may continue to approve financial promotions during the window. Firms that have not applied in this window will not be able to approve financial promotions after the window closes.
In the second 'transitional period' phase existing firms which applied during the application window will be able to continue approving financial promotions during the transitional period until such time as their application is decided.
When the third 'new regime' phase, starts the new financial promotions regime will be in effect and only those firms which have successfully applied to have the Financial Promotion Requirement cancelled or varied will be able to approve financial promotions.
Will the regulatory gateway affect all financial promotions?
No, it will not apply to:
- firms approving the financial promotions of an unauthorised person within the same group
- the approval of authorised firms' own promotions for communication by unauthorised persons
- the approval of financial promotions by principals for their appointed representatives in relation to regulated activities for which the principal has accepted responsibility
- financial promotions approved for unauthorised persons prior to the implementation of the gateway - provided the promotion remains unchanged and continues to comply with FCA rules, unauthorised persons may continue to communicate these promotions
When will these changes come into effect?
It is expected that the gateway will launch in March 2023. Before then, the FCA aims to consult on the gateway this month as part of a wider consultation aimed at strengthening the FCA rules for high-risk investments, with a view to issuing a policy statement in Q2 2022.
Separately s.21 FSMA (and other sections of FSMA in consequence) will need to be amended so that unauthorised persons can only communicate their own financial promotions if they have been approved by a firm that has FCA permission to do so.
While we have yet to see the FCA's proposed rules, it is likely that in order to approve a firm's application for variation or cancellation of the Financial Promotion Requirement the FCA will require to be satisfied that the firm has in place rigorous internal financial promotions compliance processes and procedures. Firms should expect to have to demonstrate appropriate expertise in the area of the financial products and services which they wish to approve and evidence of their thorough due diligence processes to ensure that financial promotions meet regulatory standards.
Firms affected by the new regulatory gateway would do well to start reviewing their internal financial promotions approval processes in order to be fully prepared to submit a variation of requirements application when the application window for the new regime opens.