In September the FCA announced in its Consumer Investments Strategy that it will take action over the next three years to make it harder for dishonest firms and individuals to exploit financial promotions exemptions. In its Perimeter Report published shortly afterwards the FCA expressed concern about the 'significant vulnerability' presented by the exemptions in the financial promotion regime for 'high net worth' (wealthier) and 'sophisticated' (more experienced) investors. 

The FCA's data shows that unauthorised persons are relying increasingly on these two financial promotion exemptions which allow authorised and unauthorised firms to advertise high risk investments directly to those investors without necessarily having to comply with FCA rules, potentially resulting in significant consumer harm.

These two exemptions are a well-established feature of the regulatory framework. Firms which promote investments only to high net worth and sophisticated investors do not need to be FCA-authorised, avoiding the associated costs and regulatory obligations, and do not have to take their financial promotions to an authorised person for approval. The thinking is that these investors are either better able to understand the risks of the investment (sophisticated) or better able to pay for financial advice and/or absorb a loss if an investment does not perform (high net worth).

Difficulties for the FCA

The difficulties for the FCA are twofold. First, it cannot change the exemptions - the financial promotion restriction and the exemptions from it are contained in legislation and so are a matter for the Government – and, secondly, any changes which the FCA might make to its financial promotions rules to improve consumer protections and outcomes would have no impact where unauthorised firms rely on financial promotion exemptions to promote investments. Moreover, there is evidence that the strengthening of FCA financial promotions rules can have the unintended result of unauthorised firms using the exemptions more, rather than seeking the approval of a financial promotion by an authorised person.

Difficulties with the exemptions

The exemptions themselves were last reviewed in 2005 and recent changes in ways consumers can access investments and the introduction of pension freedoms raise the question: are the exemptions still fit for purpose?

One way to self-certify as a sophisticated retail investor is for the consumer to confirm they have made more than one investment in an unlisted company in the last two years. Whereas in the past this would have required some private business experience, since the arrival of investment-based crowdfunding and peer-to-peer platforms, accessing these types of investments is now fairly straightforward, and recent FCA statistics show that at least 1.6 million consumers have investments in unlisted companies.

Similarly, the thresholds in the high net worth exemption have remained frozen for two decades. A high net worth investor needs to have an annual income of £100k or more, or more than £250k of net assets excluding primary residence and pension assets. Inflation has of course devalued the thresholds in that period, and older consumers can now convert their pensions into cash, weakening the effect of the exclusion of pension from the net assets figure.

In addition, although not an issue with the definitions of the exemptions, the FCA references evidence of coaching of investors to self-certify under the exemptions.

Next steps

One thing is clear: the FCA is dissatisfied with the exemptions as they currently stand and is unable to effectively police exemption abuse where it involves unauthorised entities. Legislative review is needed to reduce consumer harm; leaving the exemptions unchanged curtails the FCA's ability to mitigate risk and protect the interests of consumers. A review of this aspect of the legislation is both needed and anticipated, particularly if the FCA is to action effectively its Consumer Investment Strategy objective. The ball is in the Government's court to address these regulatory concerns.


Lindsay Lee

Senior Associate