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In brief

On 22 June 2021, HM Treasury (HMT) confirmed that it will take forward legislation to introduce a gateway for the approval of financial promotions of unauthorised persons. Once the gateway is in place, only firms which have successfully applied to the FCA to approve financial promotions will be permitted to approve the financial promotions of unauthorised persons. 

As we’ve previously explained, compliance with regulatory requirements regarding the approval of financial promotions has been a recent supervisory concern for the FCA, especially in circumstances where the products being marketed are complex and targeted at the retail market, and the FCA has issued a number of letters and publications setting out concerns and guidance for authorised firms approving financial promotions. For more detail on the background and reasoning behind HMT’s decision to introduce a gateway, please see our previous blog post


Contents

  1. The gateway structure
  2. Supervision, enforcement and redress
  3. Exemptions
  4. Timing and next steps
  5. Considerations for firms

The gateway structure

The gateway will take the form of amendments to the Financial Services and Markets Act 2000 (FSMA) so that the general ability of authorised firms to approve financial promotions of unauthorised firms is removed, establishing a new regulatory consent framework in its place. Specifically, section 21(2)(b) will be amended so that unauthorised persons are only able to communicate their own financial promotions if these have been approved by a firm which has obtained consent from the FCA to provide such approval. A universal requirement (the 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 undertake approval of financial promotions will need to apply to the FCA to have this requirement varied or cancelled. A firm applying for authorisation will be able to apply as part of its application for authorisation to have the requirement not to approve financial promotions varied or cancelled.

All new and existing authorised firms will be prohibited from approving the financial promotions of unauthorised persons. This will be implemented through the imposition of a requirement on their permission – the Financial Promotion Requirement. Both new and existing authorised firms that wish to approve financial promotions will have to apply to the FCA to have the prohibition removed either entirely (allowing them to approve all types of financial promotions), or partially (allowing them to approve certain types of financial promotions), via variation of requirement (VREQ) application. The FCA will be able to specifically assess the suitability and competence of authorised firms to approve financial promotions. Permissions to approve financial promotions could be limited to a specific type or types of products or services dependent on the firm’s expertise.

Supervision, enforcement and redress 

Any authorised firm that approves a financial promotion in breach of the Financial Promotion Requirement will be breaching a requirement on their Part 4A permission, and the FCA would be able to take enforcement action against that breach. The proposed amendments to section 21 of FSMA will mean that an unauthorised person communicating a financial promotion which has not been approved by an authorised firm or was approved in breach of a requirement would be committing a criminal offence. Further, if section 21 has been breached then any agreement entered into as a result of the unlawful promotion may be unenforceable.

Repeating the position taken in its consultation, HMT also confirms that consumers who invest in a product issued by an unauthorised person on the basis of a financial promotion communicated by that person would continue not to be covered by the Financial Services Compensation Scheme purely as a result of the failure of the issuer.

Exemptions

The new gateway regime will not affect the way authorised firms communicate their own financial promotions, approve their own promotions for communication by unauthorised persons, or approve the promotions of unauthorised persons within the same corporate group. 

Further, in a welcome development for the industry given the absence of any proposed exemptions in the consultation, HMT has confirmed that principals approving financial promotions for their appointed representatives (ARs) in relation to regulated activities, for which the principal has agreed to accept responsibility, will be exempt from the gateway. This is because there are also requirements on a principal to have sufficient expertise and experience to oversee the regulated activities for which the firm has accepted responsibility. This exemption also mirrors the scope of the existing exemption in the financial promotions regime relating to principals and ARs.

However, HMT has decided against grandfathering-in permissions for sectors that approve financial promotions as part of their core business model and which may have provided information on that activity to the FCA as part of previous authorisation applications. HMT’s reasoning is that the gateway creates a specific assessment of the act of approving financial promotions against the FCA’s objectives that has not been expressly required as part of the authorisation of any firm, and therefore it will be beneficial for all existing firms to pass through the gateway, regardless of their existing business models and practices.  

Timing and next steps

HMT has not set a target for introduction of the gateway – the government intends to bring forward legislation “when parliamentary time allows”, and the FCA will consult on implementation in due course.

However, HMT has confirmed that there will be a three phase transitional period for the new regime:

Phase 1: Before the transitional period commences, there will be an application window in which firms that wish to continue to approve financial promotions in the new regime will apply to do so. All existing firms can continue to approve financial promotions during this window.

Phase 2: Once the transitional period has begun, existing firms that have applied to the FCA to be able to approve financial promotions by the end of the application window will be able to continue approving financial promotions during the transitional period until their application is decided. Firms that have not made an application will not be able to approve financial promotions during the transitional period.

Phase 3: At the end of the transitional period, the new regime will commence and only those firms that have successfully applied to have the Financial Promotion Requirement cancelled or varied will be able to approve financial promotions.

Unauthorised persons will remain able to communicate any financial promotion that was approved prior to the implementation of the gateway provided the promotion remains unchanged and continues to comply with FCA rules.

Considerations for firms

As noted, HMT’s confirmation that it will exempt from the gateway principals approving financial promotions for their ARs in relation to regulated activities for which the principal has agreed to accept responsibility will be welcome news for sectors which more heavily rely on “regulatory umbrella” arrangements. While the FCA has in recent years demonstrated its concerns about principals’ compliance with their supervisory and oversight obligations in relation to ARs, it will be a relief to the industry that HMT has foreclosed the financial promotions approval regime as an avenue for the FCA to exert tighter regulatory supervision.

Areas of uncertainty remain. It is unclear how the FCA will undertake its assessments of suitability and competence to approve financial promotions, and what this will require applicant firms to demonstrate in practice. It is possible that firms may be required to demonstrate to the FCA that their internal systems and controls reflect the standards set out in the FCA Handbook regarding approval of financial promotions; in other words, the FCA may need to have confidence that the firm is able to demonstrate that financial promotions it has approved are “fair, clear and not misleading” in presentation and substance. Firms intending to proceed through the gateway should prepare to review their processes and procedures while we await legislative and regulatory changes.

Author

Mark Simpson is a partner in the Financial Services & Regulatory Group in the London office where he practices in the areas of financial regulation, financial crime, and regulatory investigations. He is a member of the Firm's EMEA Financial Services & Insurance Steering Committee, as well as its Global Funds and FinTech Groups. He participates actively in industry bodies including the Alternative Investment Managers Association. He has authored a number of articles and other publications, most notably acting as a general editor of and contributor to the International Guide to Money Laundering Law and Practice, and A Practitioner's Guide to the Law and Regulation of Financial Crime.

Author

Caitlin McErlane advises asset managers, banks, major corporates, exchanges, clearing houses and payment institutions on navigating UK and EU financial services regulation. She has particular experience in advising clients on operating in compliance with ongoing regulatory developments, including MiFID II, EMIR, the Investment Firms Regulation, ESG reforms, AIFMD and the Market Abuse Regulation.

Author

Kimberly Everitt is a Knowledge Lawyer in Baker McKenzie London office.

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