HM Treasury confirm firms wishing to approve financial promotions require FCA permission
06 July 2021
Last month, HM Treasury issued a response to its July 2020 consultation on the regulatory framework for approval of financial promotions. In its consultation, the UK Government outlined plans to significantly narrow the circumstances in which an authorised firm could approve the financial promotions of an unauthorised firm. This was owing to concerns that the existing financial promotions regime did not adequately protect consumers, and gave rise to the following risks: lack of relevant approver firm expertise; lack of approver firm due diligence; and challenges in exercising appropriate regulatory oversight. For further information on the July 2020 consultation please see our briefing here.
Scope of regulatory gateway
In its response, the Government confirms that 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').
The Government has decided to exempt firms approving the financial promotions of an unauthorised person within the same group, as well as principals approving financial promotions for their appointed representatives in relation to regulated activities, for which the principal has agreed to accept responsibility (for example SUP 12.4.2 R).
All other new and existing authorised firms wishing to approve financial promotions will have to apply to the FCA to have the Financial Promotion Requirement removed either entirely (allowing them to approve all types of financial promotions), or partially (allowing them to approve certain types of financial promotions). Firms will do this using a variation of requirement application to the FCA, and can apply to the FCA at any point for their requirements to be varied further (either to increase or decrease the scope). This gateway will ensure that the FCA has a record of which authorised firms are approving financial promotions, which will make it easier for the FCA to proactively supervise this activity. However, the gateway is not intended to require the FCA to grant permission on a promotion by promotion basis.
Transitional period
In the response, the Government also sets out proposals to implement a transitional period, to enable a smooth transition, as follows:
- 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.
Amendments to FSMA
In order to implement the proposal, the Government will amend section 21(2)(b) of FSMA to remove the general ability to communicate financial promotions which have been approved by authorised firms. This will have the effect that unauthorised persons are only able to communicate their own financial promotions if these have been approved by an authorised firm which has had the requirement on it not to approve financial promotions varied or cancelled. The Government will also make changes to FSMA to allow firms undergoing an authorisation application to apply to have the Financial Promotion Requirement varied or cancelled as part of the application process.
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. Further, an unauthorised person communicating a financial promotion which had not been approved by an authorised firm or was approved in breach of a requirement would be committing a criminal offence.
As set out in the original consultation, consumers who invest in a product issued by an unauthorised person on the basis of a financial promotion communicated by that person would not be covered by the Financial Services Compensation Scheme (FSCS). As the scheme covers claims "in connection with" protected regulated activities only and is funded by levies on authorised firms.
The Government confirms that it intends to bring forward legislation when parliamentary time allows and confirms that the FCA will consult on its proposals for implementing the gateway in due course.
