On 20th July 2020, HM Treasury (HMT) launched a consultation on a ‘regulatory gateway’ for authorised persons approving the financial promotions of unauthorised persons. It seeks to address concerns that the existing regime does not operate as a strong enough safeguard to ensure that financial promotions comply with FCA rules designed to ensure promotions are fair, clear and not misleading.
The Existing Regime
Under the existing regime, unauthorised persons cannot make a financial promotion in or into the UK unless either an exemption applies, or the promotion has been approved by an authorised firm. This is commonly known as the financial promotion restriction, and is set out in section 21 of the Financial Services and Markets Act 2000 (FSMA). When approving financial promotions, authorised persons have to comply with the rules on financial promotions in the FCA handbook as well as any product-specific rules. Authorised firms therefore perform a crucial role in ensuring that the financial promotions they approve comply with FCA rules and requirements.
It has always been something of an anomaly that, on the face of it, any authorised person can approve any financial promotion to avoid the financial promotion restriction, particularly as the range of activities regulated under FSMA has continued to expand. As the consultation notes, the FCA has very limited information about the extent to which individual firms do in fact approve financial promotions for unauthorised persons, limiting its ability to oversee the activities of the firms that do.
The FCA’s oversight of such approvals is, by necessity, generally reactive but, crucially, the consultation notes that it would be impractical for firms to notify the FCA each time they approve a financial promotion or for the FCA to check each approval before the financial promotion is communicated.
According to the consultation, experience in recent years suggests that additional safeguards are needed to ensure that approval by an authorised person effectively ensures that consumers are protected from deficient and potentially harmful promotions. Examples include where the approving firm has approved a financial promotion relating to a product beyond its ‘sphere of expertise’, or has not undertaken adequate due diligence, when failing to ensure that the promotion met the FCA rules and requirements.
The Proposals for Reform
To strengthen the FCA’s ability to ensure the approval of financial promotions operates effectively, the consultation proposes to establish a ‘regulatory gateway’, meaning that authorised firms will be required to first obtain the consent of the FCA before they can approve the financial promotions of unauthorised persons.
To do this, the government proposes to amend s. 21(2)(b) of FSMA so that authorised firms will need to obtain specific consent from the FCA before being able to approve the financial promotions of unauthorised persons. This would enable the FCA to operate a regulatory gateway for such approval activities and, according to the consultation, would increase the effective ability of the FCA to oversee and supervise authorised firms providing such approvals, to prevent and intervene where necessary, to improve due diligence for such approvals, and to ensure that the authorised firms have relevant expertise to approve the promotion.
In order to achieve this, the government proposes two options:
Option 1: Restrict approval of financial promotions of unauthorised persons through the imposition of requirements by the FCA by amending section 21(2)(b) of FSMA so that unauthorised persons are only able to communicate their own financial promotions if those promotions have been approved by an authorised person which has obtained consent from the FCA to provide such approval.
The FCA would be given the power to impose requirements to prevent all existing authorised persons from approving financial promotions. A firm that wished to approve financial promotions would then need to apply to the FCA to have its permissions amended so that this blanket ban is lifted for that firm. The FCA would assess the fitness and competence of each firm when determining an application. Such FCA consent to approve financial promotions of unauthorised persons could also be limited to products or services within authorised firms’ areas of expertise.
On the whole, this option preserves the existing regime but will strengthen the FCA’s ability to ensure that the existing safeguard operates effectively. It will ensure that the ability to approve financial promotions no longer arises by default simply by virtue of a firm being authorised.
Option 2: Specify the approval of financial promotions communicated by unauthorised persons as a regulated activity under FSMA which would involve amending the Regulated Activities Order to make the approval of financial promotions of unauthorised persons a regulated activity. Section 21(2)(b) would also be amended to require financial promotions of unauthorised persons to be approved by a firm with the relevant Part 4A permission.
Under this option, firms would require a Part 4A permission from the FCA in order to perform the activity of approving financial promotions of unauthorised persons.
This option is regarded by the government as representing a more significant change than option 1, on the basis that “it would fundamentally alter the regulatory treatment of financial promotions” made by unauthorised persons. In truth, the difference between having to obtain consent (option 1) or permission (option 2) seems largely semantic.
The consultation notes that the government favours Option 1, as Option 2 is, in the view of HM Treasury, arguably a disproportionate way of achieving the intended outcome.
Exemptions from the new regime
The consultation proposes that these measures will not affect the communication of financial promotions by authorised persons, the approval by authorised persons of their own promotions for communication by unauthorised persons, or the approval by an authorised firm of promotions made by unauthorised persons within the same corporate group.
These proposed exemptions are welcome, and should, for example, mean that the approval of financial promotions by a principal for communication by its appointed representative carrying on business for its principal, or by an unauthorised introducer, would not be subject to this new regulatory gateway. It is less clear how this particular exemption will be drafted, however (no draft Order has been published), and it will be important to check the scope of this exemption carefully.
Putting in place higher hurdles for the approval of financial promotions may lead to a greater focus on the existing exemptions in the Financial Promotion Order, which have not themselves been reviewed in detail since 2005. The precise scope of a number of these exemptions is not always clear, but if approval of financial promotions becomes harder, there may be pressure to push the interpretation of some of the exemptions further than has generally been the case up till now.
Until the implications for an authorised firm of applying for and maintaining FCA consent or permission to approve financial promotions are made clear by the FCA, it will be difficult to judge whether this is something that firms may want to obtain on a precautionary basis. For example, corporate finance advisers can sometimes find themselves needing to provide an ad hoc approval when it becomes clear that an exemption will not be sufficient to enable their client to make a financial promotion, and they will want to weigh up the ability to do so against any additional regulatory burden that goes with obtaining and maintaining consent or permission from the FCA.
The consultation does not spell out what grandfathering or interim permission regime may be required, although it recognises the need for one. It simply states that “Working with the FCA, the government will consider what legislative measures are necessary to facilitate a smooth transition to the new regime”. Clearly, for firms that regularly approve financial promotions, a hiatus while their application is being considered would be decidedly unhelpful, and would also risk putting pressure on the FCA to make its decision on a firm’s application more quickly than it would wish.
What now? What next?
In November 2019, the FCA issued guidance on approving the financial promotions of unauthorised persons, which explained the practical implications of the existing regime.
The government seeks the views of stakeholders, particularly retail consumers, authorised firms and unauthorised persons, on the two options detailed in the consultation paper as well as responses to the questions set out in the consultation form, which should be emailed to FinProms@hmtreasury.gov.uk by 12:00pm on 25th October 2020.
The government will then analyse all responses before setting out the next steps.
To access further information on this consultation click here.
Source: DAC Beachcroft
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