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The financial promotions regime – time for a change?

Posted on 21 December 2021

HM Treasury has published a consultation into the UK's financial promotions regime, focusing on changes to three key exemptions relating to high net worth individuals and sophisticated investors (the Consultation).

Background

The marketing of financial products and services in the UK is restricted under the Financial Services and Markets Act 2000 (FSMA). In general, a person who is not authorised by the FCA cannot communicate a financial promotion unless either the content of the promotion is approved by an FCA-authorised person or an exemption from the regime is available. The exemptions to the regime are set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO).

The Consultation is focused on three specific exemptions:

  • Certified high net worth individuals
  • Sophisticated investors
  • Self-certified sophisticated investors

These exemptions are frequently relied upon, particularly by unlisted companies looking to raise capital from business angels, but it has been over 20 years since they were introduced and 15 years since they were last reviewed.

The FCA is concerned that the exemptions have not kept pace with economic, social and technological changes. It is also aware that the improper use of the exemptions (through superficial engagement and coaching), a lack of transparency and a lack of engagement with the exemption requirements is leading to significant consumer detriment.

Unauthorised firms relying on these exemptions have no touchpoint with the FCA and, consequently, it is difficult to identify bad actors.

The Proposals

The Government has carried out a review of the exemptions listed above. While it believes that there is merit in retaining these exemptions, the Consultation sets out five proposals for how they could be updated. These are:

  1. Increasing the financial thresholds for high net worth individuals. This could be either (i) in line with inflation, by raising the net income threshold from £100,000 to £150,000 and net assets threshold from £250,000 to £385,000 or (ii) linked to population access (limited to the top 1%) by increasing the income threshold to £175,000 and the net assets threshold £900,000;
  2. Amending the criteria for self-certified sophisticated investors to (i) remove the test relating to having invested in more than one unlisted company; and (ii) in relation to the company director test, increasing the annual turnover threshold for the company from £1m up to £1.4m;
  3. Placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated. In this case, the proposal is to move to a position where the firm communicating the financial promotion must have a reasonable belief that the individual concerned meets the high net worth or sophisticated investor criteria, as applicable. The firm must also provide certain information about themselves (such as address, contact details and Companies House number or equivalent) to help consumers undertake basic due diligence and assist the FCA investigate potential non-compliance with exemptions;
  4. Updating the high net worth individual and self-certified sophisticated investor statements by, for example, updating the format, reordering the text, simplifying the language and requiring greater investor engagement (for example, by requiring investors to select which criteria they meet in order to meet relevant classification); and
  5. Updating the name of the high net worth individual exemption.

Next Steps

The Consultation was published on 15 December 2021 and will close on 9 March 2022. In the meantime, we wait to see how the Government will balance consumer protection against a need to safeguard access to capital by SMEs relying on these exemptions.

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