Cryptoasset provider finfluencers and overseas persons take heed

On 6 December 2022, the FCA issued a consultation paper on "Introducing a gateway for firms who approve financial promotions" (CP 22/27).

Earlier in the year, HMT confirmed it will prohibit authorised firms (existing or new) from approving financial promotions for unauthorised persons, unless they've received FCA authorisation to do so via a financial promotions "gateway" (see our briefing here). The Financial Services and Markets Bill 2022-23 contains legislation to this effect.

CP 22/27 sets out how the FCA plans to operationalise the new gateway including:

• how the FCA will assess applicants and the basis for granting or refusing applications. At first glance, the Regulator will apply a restrictively high bar and require approvers to show they can assess the commercial viability of the promoted product / service and assess whether the unauthorised firm can deliver the advertised headline rates of return;
• bi-annual reporting requirements; and

• requiring approved firms to notify the FCA when they approve, or amend or withdraw approval of, a financial promotion, within 7 days of doing so.

The gateway supports a series of significant changes to the UK financial promotions regime that have been in the works for over 30 months, and therefore must also be read alongside:

(a) the new conduct rules for firms approving financial promotions (prior to the gateway coming into effect). The rules apply from February 2023 (see our briefing here);

(b) HMT's proposals to narrow FPO exemptions and therefore the 'pool' of exempt person which firms (e.g. overseas persons) can market to will decrease. This could therefore increase demand for approvers (see our briefing here); and

(c) "qualifying cryptoassets" being brought within financial promotions regime, as confirmed by HMT. Currently unregulated cryptoasset firms can advertise in the UK as the financial promotions regime does not apply to cryptoassets (although they must be registered with the FCA for AML purposes). In future, only FCA authorised firms will be able to advertise qualifying cryptoassets. This means unregulated cryptoasset firms (including those registered with the FCA) will not be able to market their crypto products and services. HMT and the FCA's clamp down on 'back door' provision of crypto services in the UK could create an increased demand for approvers (see our briefing here).

In a nutshell, unregulated firms like cryptoasset service providers, overseas persons, unregulated introducers and lead generators, unregulated individuals like social media influencers and "finfluencers" etc. will not be able to advertise products and services in the UK unless they can find a firm that can approve their promotions, or unless the firm requesting their marketing services has successfully obtained permission to authorise financial promotions – a challenging prospect if any.

How will the FCA evaluate applications for permission to approve financial promotions under the new scheme?

A firm applying to approve financial promotions of investments via the gateway will need to detail the type of financial promotions it is seeking to approve, and demonstrate various things to the FCA including:

• that it can continue to satisfy the Threshold Conditions;
• that it has processes in place for maintaining adequate records of the financial promotions which it approves;
• how it will consider the commercial viability of the proposition described in the promotion;
• how it will satisfy itself that a service will in-fact be provided by the issuer of the promotion to a customer;
• how it will assess whether there are fees, commission or other charges within the investment structure, or elsewhere, that could materially affect the ability of the product provider to delivery advertised or headline rates of return;
• that it has suitable policies and procedures for monitoring promotions and, where appropriate, withdrawing approval or requiring a promotion be amended;
• that it is approving financial promotions of investments that are broadly in line with its Part 4A permissions; and
• that it has sufficient individuals with appropriate competence and expertise to approve financial promotions of the type in relation to which it is seeking permission.

The above requirements are prohibitive and we would be surprised if many (or any) firms are able to obtain authorisation to approve promotion of products/services that are complex, risky, or unregulated – namely cryptoassets.

The FCA will assess and determine whether to grant permission with reference to whether the firm can demonstrate the above, the relevant rules which apply to the type of promotions (products and services) the firm wishes to approve, and whether it is desirable to do so in order to advance one or more of the FCA's operational objectives, e.g. to secure an appropriate degree of protection for consumers. The regulatory will also make the firm's ability to approve financial promotions publicly available on the FCA register.

The FCA also intends to insert a new chapter 6A into the Supervision Manual (SUP) that will contain guidance on applying for permission to approve financial promotions. Firms are also advised to review the FCA's 2019 guidance for firms approving financial promotions before submitting an application via the gateway.

Refusals: The FCA may refuse an application on the basis of the above or its operational objectives. In some circumstances, the FCA may let the firm know that it would consider granting permission on different or narrower terms. Where an application is refused, the FCA would follow the process outlined in draft legislation and in the Decision Making and Penalties Manual (DEPP).

Can the FCA vary or cancel an approval?: Yes, the FCA may amend the terms of, or cancel, a firm’s permission to approve financial promotions. The power could be exercised where a firm has not approved any promotions over a 12 month period or where this was otherwise desirable to advance one or more of the FCA's operational objectives. This could done on the voluntary application of the firm or using the FCA’s own-initiative powers.

Conduct requirements: The FCA will also require firms approving financial promotions to:

• comply with bi-annual reporting requirements; and
• notify the FCA when they approve, or amend or withdraw approval of, a financial promotion, within 7 days of doing so.

This is additional to the conduct requirements set out in PS 22/10 (see Section 3 below).

Transitional periods: HMT previously set out the below transitional process (which is yet to be legislated and the exact length of the transitional period yet to be determined):

• Application window: all authorised firms can continue to approve promotions;
• Transitional period: authorised firms that have submitted an application can continue to approve promotions;
• New regime: only authorised firms that have had the requirement varied or cancelled can approve promotions.

If an applicant for authorisation receives confirmation that Part 4A permission has been granted before the gateway application window opens, it will need to separately apply through the gateway, along with other existing authorised firms if it wishes to approve financial promotions.

Interrelation with other financial promotions developments

New conduct rules when authorising financial promotions

Under the current framework, authorised firms can approve financial promotions of a unauthorised firm. Firms are currently not required to undergo any specific assessment before they can do so.

However, the FCA has observed:

• firms approving financial promotions for products which are completely unrelated to their areas of expertise;
• that the quality of approved financial promotions have been poor, particularly in relation to high risk investments and performance claims; and
• a lack of due diligence on the unregulated person as well as ongoing monitoring.

To combat the above, in August the FCA published its final rules restricting the promotion of high risk investments to mass retail clients, in PS 22/10 on "Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions".

PS 22/10 introduced various conduct requirements (in COBS 4) for authorised firms approving financial promotions (amongst other changes, see our briefing here). Going forward, firms approving financial promotions must:

• self-assess and self-certify that they have the necessary competence and expertise in an investment product or service before approving the financial promotion;

• ensure all financial promotions disclose: (a) the name of the approver; and (b) the date of approval approved;
• ensure approved promotions remain compliant for the life of the promotion;
• take reasonable steps to monitor the compliance of approved financial promotions, and obtain attestations of "no material change" every 3 months, for the lifetime of the approved promotion;
• withdraw approval if the approved promotion no longer complies with the relevant rules; and
• consider conflicts of interest.

However, it would be difficult for the FCA to effectively supervise the above measures if the FCA is not aware of which firms approve financial promotions, and the types of products and services they are approving. Therefore, the regulatory gateway works in tandem with these measures.

Proposed changes to FPO exemptions

In lieu of obtaining approval from an authorised firm, unauthorised persons can communicate financial promotions if they can rely on an exemption under the Financial Promotions Order (FPO).

Commonly used exemptions include communicating financial promotions to recipients who are "high net worth individuals" (Article 48 of the FPO), self-certified "sophisticated" (Article 50A of the FPO), and certified "sophisticated" (Article 50 of the FPO) investors.

The exemptions are available in relation to the promotion of investment activities and collective investment schemes, and are commonly utilised, including by overseas firms which rely on the overseas persons exclusion (OPE), in order to promote and undertake regulated activities with UK clients.

In December last year, HMT consulted on changing certain quantitative and qualitative thresholds which must be met for the above exemptions to apply, thereby narrowing the availability of the exemptions (see our briefing here).

If HMT moves forward with its proposals, the FCA expects that unauthorised firms that currently rely on the exemptions to promote their products may see it as less viable to do so, and choose to engage with an authorised firm to approve their promotions instead. This could lead to an increase in the number of firms that want to go through the financial promotions gateway.

How will this impact cryptoasset service providers?

Earlier in 2022, HMT confirmed that the promotions of certain "qualifying cryptoassets" will be brought into the financial promotions regime (see our briefing here). This means that all crypto promotions will have to be issued or approved by an authorised firm, which does not include cryptoasset service providers registered with the FCA under the money laundering regime. Accordingly, the FCA expects there to be strong demand from cryptoasset business for authorised firms to approve their financial promotions.

The FCA comments that subject to HMT's proposals for qualifying cryptoassets, the number of authorised firms with sufficient competence and expertise to approve cryptoasset financial promotions is likely to be limited. It will also be incredibly difficult for authorised firms to show the FCA that it can appropriately consider the commercial viability of cryptoasset propositions described promotions which it wishes to approve. Cryptoasset activities carried on by unregulated firms will therefore be extremely limited in how they can market in the UK.

How does this interact with consumer duty?

Firms with a direct relationship with retail consumers will have the greatest responsibility under the Consumer Duty. Authorised firms will be required to consider their responsibilities under the Duty when approving promotions for unauthorised firms.

Approvers will be expected to ensure that the financial promotions they approve support retail consumers’ understanding by ensuring that they meet the information needs of customers, are likely to be understood by customers intended to receive them, and enable them to make decisions that are effective, timely and properly informed.

Approvers will also be expected to ensure that the financial promotion is tailored to the characteristics of the customers intended to receive the financial promotion, including by reference to any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm.

A timeline of developments

July 2020: HMT launched its consultation on a "Regulatory Framework for the Approval of Financial Promotions" (see our briefing here).

July 2021: HMT replied to its consultation confirming it will be introducing a "gateway" for the approval of unauthorised persons' financial promotions. Under this regime, all new and existing authorised firms will be prohibited from approving the financial promotions of unauthorised persons (to be implemented via a requirement on their permission – the "Financial Promotion Requirement"). To approve financial promotions, firms will need to have the Financial Promotion Requirement removed entirely (allowing them to approve all types of financial promotions), or partially (allowing them to approve certain types of financial promotions). New firms can do this at the same time as applying for Part 4A permissions, and existing firms will have to submit a variation of permission (VoP) (see our briefing here).

HMT signalled that exemptions will be available for: intra-group approvals, firms approving their own promotions for onward communication by an unauthorised firm, and firms approving financial promotions of authorised representations, where the promotion relates to the principal's regulated activity.

HMT also signalled that existing authorised persons will benefit from a transition period during which they can continue approving financial promotions until their VoP has been determined.

July – November 2022: The Financial Services and Markets Bill 2022-23 (FSMB) was introduced in the House of Commons on 30 July 2022 and completed the committee stage on 3 November 2022 (see our briefing here).

The FSMB implements HMT's proposal by introducing the following into FSMA:

• a new section 55NA which reflects the regulatory gateway;
•  a new section 55BN which gives HMT the power to make exemptions;
• a new subsection 2A into section 21 so that an authorised firm can only approve a financial promotion if it is either permitted to do so having gone through the regulatory gateway under new section 55NA, or an applicable exemption applies under new section 55NB.

December 2022: The FCA gets into the mix.

What next?

The deadline for responses is 7 February 2023. The FCA expects to publish a policy statement and final rules in the first half of 2023, although its timings depend on the legislative progress of the Financial Services and Markets Bill 2022-23.

Appendix 1 to CP22/27 contains the text of the draft Handbook instrument that will make the relevant amendments to the FCA Handbook: the Financial Promotion (Approver Permission) Instrument 2023.

Authors: Emma Tran and Bisola Williams