UK financial promotions: The new gateway and other reforms

Introduction

Following this week’s opening of the application window for the Financial Conduct Authority’s (FCA’s) new regulatory ‘gateway’ for firms that approve financial promotions, we take a look at this latest change to the UK regime as well as some of the practical considerations for firms.

The new gateway is one of a number of reforms to the UK’s financial promotion regime that have been proposed and/or introduced in recent months, whether as part of the Government’s post-Brexit plans to improve the UK regulatory regime or to address an identified need for stronger regulation due to the greater prevalence in the market of products and services that are deemed more risky. This briefing note also considers some of those other changes and what they mean practically for firms.

Approving financial promotions – the new regulatory gateway

Firms and individuals that are not authorised by the FCA or the Prudential Regulation Authority (PRA) to carry out a regulated activity are prohibited from communicating an ‘invitation or inducement’ to engage in investment activity unless certain criteria are met. An unauthorised firm or individual wishing to communicate such a financial promotion will first need to have it approved by an FCA or PRA authorised firm unless an exemption applies. Authorised firms must ensure that any financial promotion they approve complies with the relevant FCA rules – including the requirement that the promotion is clear, fair and not misleading – to help protect consumers from potential harm.

Currently, this approval can be given by any authorised firm – no specific suitability tests or assessments apply. HM Treasury was concerned about the risks this could create where an authorised firm approves a financial promotion without having specific expertise in the relevant area, or without carrying out sufficient due diligence around the unauthorised firm or the promotion. It also flagged that the FCA may not be able to exercise appropriate regulatory oversight in this area given the absence of a requirement to notify the regulator of these approvals.

The new regime

In the Financial Services and Markets Act 2023 (FSMA 2023), which received Royal Assent in June this year, the Government legislated for a new regulatory ‘gateway’ for firms approving financial promotions. The FCA is responsible for implementing the gateway and it published a policy statement (PS23/13) on 12 September 2023, setting out its final policy position along with near final rules and guidance.

The new regulatory gateway, which will come into effect in February 2024, addresses these concerns by amending section 21 of the Financial Services and Markets Act 2000 to require authorised firms to seek FCA permission for approving the financial promotions of unauthorised firms (with some exemptions – firms approving their own promotions for communication by an unauthorised person, or approving promotions to be communicated either by an unauthorised person within their corporate group or by an appointed representative, will not generally have to pass through the gateway).

In PS23/13, the FCA explained how it will assess firms at the gateway to determine whether they have the necessary competence and expertise to effectively judge whether promotions for particular products comply with FCA rules. Only firms that pass that assessment will be given permission to approve financial promotions for unauthorised persons – so-called ‘approver firms’. The FCA hopes this will ensure firms approve promotions to a high standard, so that consumers receive high-quality financial promotions that enable them to make effective and well-informed decisions. Approver firms will also be subject to reporting requirements to help the FCA supervise them more proactively.

Practical considerations for firms

Firms may wish to focus their attention on certain areas before applying to the FCA for approver permission. One of these is knowledge and capability – firms should ensure individuals that will be involved in reviewing and approving financial promotions are competent, so that they can understand the viability of investments being promoted and identify key associated risks to ensure they are properly disclosed. Another is governance and oversight – for example, the firm’s Board should satisfy itself that current controls and practices comply with regulations and remain within the firm’s risk tolerances. Record keeping is also important, as firms may be asked to evidence the due diligence they carried out as part of the approval process for a financial promotion as well as any relevant ongoing monitoring of compliance. In addition, firms should ensure their remuneration schemes and incentives for staff with responsibilities for approving and reviewing financial promotions do not promote poor conduct practices.

Next steps

Authorised firms wishing to continue to approve financial promotions will need to submit an application for approver permission to the FCA during the initial application window, which opened on 6 November 2023 and closes on 6 February 2024. Any firms that have not applied to the gateway by the time that window closes on 6 February will no longer be able to approve financial promotions, unless an exemption applies or until they have applied for and been granted permission to approve (which they will be able to apply for using a variation of permission form). Firms that have applied during the initial window will be able to continue approving financial promotions for unauthorised persons while the FCA determines their application.

The new financial promotions regime for cryptoassets

Another significant change in this area is the extension of the financial promotion restriction to cover ‘qualifying cryptoassets’, which came into effect on 8 October 2023.

The expanded regime

This change, introduced by the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (FPO SI), means that a financial promotion relating to qualifying cryptoassets can only be communicated by an FCA authorised firm, by an unauthorised firm where the communication is approved by an authorised firm, or where an exemption applies. This applies to firms’ communications relating to dealing, arranging, managing or advising in relation to qualifying cryptoassets, which are made in the course of business to UK consumers even if the firm is based overseas and regardless of what technology is used to make the promotion. The test is whether the communication is capable of having an effect in the UK.

A ‘qualifying cryptoasset’ is (very broadly) any cryptographically secured digital representation of value or contractual rights that is transferable and fungible, including cryptocurrencies such as Bitcoin and Ethereum. The definition does not include certain exempted cryptoassets such as e-money, existing controlled investments and fiat currency and is unlikely to include most non-fungible tokens.

Cryptoasset businesses registered under the Money Laundering Regulations 2017 (MLRs) can, under an exemption introduced by the FPO SI, communicate their own financial promotions of qualifying cryptoassets to UK consumers in accordance with the FCA rules without the need for further FCA registration or authorisation or to have an authorised firm approve their financial promotions. They can also communicate a non-real time financial promotion (e.g., through written material, brochures, websites, letters or emails) prepared by a registered person under the MLRs on that person’s behalf.

Communicating a financial promotion in breach of the restriction or the FCA rules is a criminal offence punishable by up to 2 years imprisonment and/or an unlimited fine, as the FCA emphasised in a letter to firms in July. An agreement entered into as a result of an unlawful communication, such as a cryptoasset investment agreement, may also be unenforceable against the customer.

It is also important to note that the FCA has categorised cryptoassets as a specific type of high-risk investment (a ‘restricted mass market investment’ or RMMI) and has therefore applied the associated restrictions on how they can be marketed to UK consumers as set out in the FCA’s policy statement PS22/10 on high-risk investments (explained below), with some tailoring for cryptoassets specifically. The FCA announced in September that it would consider giving crypto firms more time to implement some of these rules (until 8 January 2024) if they applied for a modification by consent – for more detail please see our blog.

Practical considerations for firms

These changes have a significant impact both on authorised firms (which must have appropriate competence and experience to approve financial promotions of qualifying cryptoassets) and on crypto businesses registered under the MLRs (which will have to engage with the FCA rules on financial promotions for the first time).

Firms approving or communicating financial promotions on cryptoassets must ensure they are now compliant with the detailed FCA rules on cryptoassets, including by (a) training staff to identify financial promotions, obtain the relevant competence and expertise in relation to cryptoassets and determine what they need to do to comply with the new rules; and (b) having in place appropriate systems and controls for the required processes under the relevant rules (particularly those specific to high-risk investments, which are discussed below).

Firms should also have regard to the FCA’s finalised guidance (FG23/3), published on 2 November 2023, which sets out additional guidance on its expectations of firms communicating cryptoasset financial promotions to UK consumers.

Changes to financial promotion exemptions

HM Treasury has also this week confirmed that it will be proceeding with proposed reforms to the financial promotions exemptions for high net worth individuals and sophisticated investors. The Government intends to raise the financial thresholds to qualify for these exemptions in order to account for inflation, tighten other eligibility criteria to reduce the risk of capturing ordinary consumers, and strengthen the statements that investors are required to complete when using the exemptions. The statutory instrument (SI) to make these changes was laid on 6 November 2023 and the Government plans to bring the changes into force on 31 January 2024.

Strengthened rules for high-risk investments

In August 2022, the FCA published PS22/10 setting out stronger financial promotion rules for high-risk investments and firms approving financial promotions. The rules began to apply on 1 February 2023, with the exception of the risk warning requirements which have applied since 1 December 2022. As mentioned above, these rules also apply with some tailoring to financial promotions of cryptoassets.

The new rules made changes in three main areas: the classification of high-risk investments, the consumer journey into those investments, and strengthening the role of firms approving and communicating financial promotions.

Classifying high-risk investments

The changes rationalised the way high-risk investments are categorised, to ensure products with broadly similar characteristics are treated in the same way under the financial promotion rules, but without changing the level of marketing restrictions that apply to these investments. The FCA rules now refer to three types of product categories, for which different marketing restrictions apply:

• Readily realisable securities – e.g., listed or exchange traded securities. These are not classed as high-risk investments and no marketing restrictions apply, although general FCA conduct rules on marketing do.
• RMMIs – high-risk investments including non-readily realisable securities and peer-to-peer agreements. RMMIs can be mass marketed to retail investors subject to certain restrictions.
• Non-mass market investments (NMMIs) – also deemed high-risk and include non-mainstream pooled investments (e.g., in an unauthorised fund) and speculative illiquid securities. Mass marketing of NMMIs to retail investors is banned (subject to certain exemptions and restrictions).

Consumer journey into high-risk investments

To address the FCA’s concerns that too many consumers were simply ‘clicking through’ and accessing high-risk investments without understanding the risks involved, PS22/10 introduced several measures and ‘positive frictions’ to the consumer journey into high-risk investments. Some of these apply to all types of financial promotions of high-risk investments, while others apply only to direct offer financial promotions (DOFPs) to retail clients.

For example, all financial promotions on high-risk investments are now required to include a standard risk warning that complies with detailed prescribed format requirements and contains a link which, when clicked, will cause an appropriate prescribed risk summary to ‘pop up’. In addition, incentives to invest (e.g., bonuses, cashback and free gifts) are banned in financial promotions of high risk investments to retail clients, including high net worth and sophisticated investors, although there is a specific exemption for ‘shareholder benefits’. This rule is intended to capture incentives such as refer a friend or new joiner bonuses.

Further positive frictions are added into the consumer journey for DOFPs of RMMIs – before communicating this type of promotion to retail clients, firms must comply with additional requirements for a cooling off period, a personalised risk warning, ensuring the customer falls within a prescribed client category, and carrying out an appropriateness assessment.

Strengthening the role of firms approving and communicating financial promotions

Finally, there are strengthened rules for firms approving and communicating financial promotions, with the aim of developing a ‘robust regime’ to complement the new regulatory gateway. The strengthened rules include a requirement for the name of the approver and date of approval to be included on the face of an approved promotion to a retail client, and ongoing requirements around monitoring, record keeping, conflicts of interest, and competence and expertise.

Practical considerations for firms

The rules on high-risk investments have a real impact both on firms communicating and those approving financial promotions of these investments, as firms must ensure they have in place policies, systems and controls to comply with these rules. For example, firms communicating their own financial promotions of high-risk investments need to ensure the appropriate risk warnings and risk summaries are set up for each promotion and they need to confirm they do not communicate DOFPs or, if they do, that the appropriate steps and measures are set up on their systems and websites.
Firms approving financial promotions must ensure the relevant checks are made to ensure compliance with the content of the financial promotions, that they have the relevant competence and expertise, and that processes are in place to ensure ongoing compliance, recording of required information and, where necessary, the withdrawal of financial promotions they have previously approved.

Proposed FCA guidance on financial promotions in social media

Another area of concern for the FCA this year has been financial promotions in social media. In July 2023 it published guidance consultation GC23/2, setting out proposed updates to its existing guidance on social media and customer communications with the aim of modernising the information firms should use when promoting financial products or services online, to reflect the current social media landscape.

The guidance consultation closed last month and final guidance is expected later in 2023.

Potential changes to financial promotion rules for BNPL

There are also financial promotion rule changes in the pipeline for buy-now-pay-later (BNPL) products.

In February 2023, HM Treasury published its final consultation on proposed legislation to bring firms offering currently unregulated BNPL or short-term interest-free credit (STIFC) products into the financial services regulatory perimeter.

Under the existing financial promotion regime, an unauthorised merchant that offers the newly-regulated (under HM Treasury’s proposals) agreements of a newly-authorised third-party lender as a method of payment would not be subject to the financial promotion restriction. HM Treasury confirmed in its consultation that it plans to change this.

The proposals would require unauthorised merchants that offer BNPL or STIFC products as a payment option to have their financial promotions approved by an authorised firm – which, from February 2024, will need the appropriate ‘approver firm’ permission. In practice, the Government’s intention is that third party lender partners would provide merchants with pre-approved materials as part of the overarching commercial arrangements between them, rather than having each financial promotion individually approved.

We are still awaiting an announcement from HM Treasury as to the outcome of the consultation (which ran until 11 April 2023) and once the draft legislation is finalised the FCA will need to develop and consult on the relevant rules. However, FCA chief executive Nikhil Rathi confirmed at a Treasury Committee hearing in July that once the legislation has been finalised, the FCA will look to bring BNPL firms into regulation within 12 months.

Concluding remarks

Firms will need to check that they are aware of, and prepared for, all relevant changes to the financial promotion regime. In particular:

• Applications to the FCA’s new regulatory gateway for ‘approver firm’ permission must be submitted before 6 February 2024 to avoid losing the ability to approve financial promotions.
• Firms that promote qualifying cryptoassets should ensure they are compliant with the new rules that came into force on 8 October 2023 (subject to any delays granted on a firm-by-firm basis following a relevant application to the FCA), taking into account the FCA’s recently published final guidance on crypto financial promotions.
• All firms that promote financial products or services online should keep an eye out for the publication of the FCA’s final guidance on financial promotions in social media later this year.
• BNPL firms should watch for developments in relation to HM Treasury’s proposals to bring BNPL and STIFC products into the scope of the financial promotions regime (and financial services regulation more broadly).