For the first time in 15 years three exemptions in the Financial Promotion Order (FPO) are being reviewed. The Treasury has published its Consultation on the exemptions for high net worth individuals and sophisticated investors.

We outlined some of the difficulties with the current high net worth individual and self-certified investor exemptions here. 

Retaining and updating the exemptions

The Treasury makes the case for retaining the exemptions.  Originally introduced to make it easier for firms to directly promote investment opportunities to 'business angels' and to reduce costs to SMEs of raising finance from sophisticated private investors, the exemptions remain important today for that same purpose.  High net worth individuals and business angels are an important source of finance and expertise for potentially high-growth, innovative SMEs. 

With appropriate tweaking to bring them up to date, the exemptions should, the Treasury believes, be retained as these investors are better placed to cope without the regulatory financial promotion regime protections afforded to ordinary retail investors and to absorb losses should investments not perform well.  The exemptions need to be updated to reflect today's economic, social and technological circumstances and to mitigate the risk of the exemptions being misused. 

Three objectives for changes

The Treasury identifies three key objectives underpinning the changes it proposes:

  • thresholds within the exemptions should be set to reflect investors' experience or their ability to absorb losses.
  • the risk of investors who do not meet the exemption conditions receiving the promotions should be mitigated.
  • investors should understand the regulatory protections they will not get and should be able to take responsibility for their own investment decisions.

Five proposals for reform

The Treasury proposes five reform proposals designed to achieve the three objectives:

  • Proposal 1 - increasing the financial thresholds for high net worth individuals: the proposal is to increase the current thresholds of £100k earnings in the past year and £250k of net assets to £150K and £385k respectively to reflect inflation. The Treasury does not propose changing the assets in scope of the net asset calculation, so an investor’s primary residence, or any loan secured on that residence; any rights under a qualifying contract of insurance; and any benefits in the form of pensions or otherwise would remain excluded notwithstanding pension freedoms.
  • Proposal 2 - amending the criteria for self-certified sophistication: the current requirement that an investor must have made more than one investment in an unlisted company in the previous two years to be classified as a self-certified sophisticated investor is to be removed as it is no longer an indicator of investor sophistication due to the rise of online investing.  The current condition of being a self-certified sophisticated investor that the person has in the last two years been a director of a company with an annual turnover of at least £1 million is to be updated with a £1.4 million annual turnover threshold to reflect inflation.
  • Proposal 3 - placing a greater degree of responsibility on firms to ensure individuals meet the exemption criteria: instead of the current requirement that firms should ‘believe on reasonable grounds’ that the individual they are communicating to has signed the high net worth individual or self-certified sophisticated investor statement, the proposal is to require firms to have a reasonable belief that an individual meets the criteria, not simply that they have signed a relevant statement. The Consultation offers no guidance on how firms should determine this, which will be a concern to firms relying on these exemptions. Also under the proposals firms will be required to provide their details in any communications made using the exemptions, to enable consumers to carry out due diligence and to assist the FCA in any investigations.
  • Proposal 4 – updating the high net worth individual and self-certified sophisticated investor statements:  the Treasury is proposing substantive changes to the format, is simplifying the language with a view to making the implications of losing the financial promotions regime protections clearer, and requiring the investor to select which specific criteria they meet in order to be classified as high net worth or sophisticated, and to set out how they meet these criteria.  The thinking is that by requiring the investor to actively engage with the content in the investor statement before signing it accurate self-certification rates will improve.
  • Proposal 5 – names of the exemptions:  the Treasury proposes to amend the name of the certified high net worth exemption to the ‘high net worth individual’ exemption as since 2005 these investors have not required to be certified by a third party.

Next steps

Firms should follow the proposals with a close eye, particularly proposal 3, which places a greater degree of responsibility on firms to make sure individuals meet the exemption conditions.  In practice this may mean firms asking for additional information from individuals to evidence their reasonable belief that the consumer meets the relevant criteria. 

Firms should also follow with interest the proposed increased thresholds.  The Treasury appears to be proposing bare minimum changes and increases here, particularly the proposed increase in the net assets threshold for high net worth individuals.  The proposed net assets increase takes no account of pension wealth which can be used more easily for investments purposes now.

The Consultation runs until 9 March 2022 and it is clear that the Treasury is interested in the views of all interested parties including investors.

Contributors

Lindsay Lee

Senior Associate

Bruce Stephen

Partner