HM Treasury recently published the response to its consultation on the Regulatory Framework for Approval of Financial Promotions.
The current position
Under section 21 of the Financial Services and Markets Act 2000 (“FSMA”) a financial promotion must not be communicated, in the course of business, unless:
- the communication is made by an authorised person, or
- the content of the communication (which is made by an unauthorised person) is approved for the purposes of section 21 by an authorised person (the “restriction on financial promotion”).
An authorised person is a person that has received the approval of the Financial Conduct Authority (FCA), or the Prudential Regulatory Authority (PRA) to carry on a regulated activity.
There are a number of exemptions to the restriction on financial promotion that are set out in the FSMA (Financial Promotion) Order 2005 (“FPO”).
So, what does this mean?
Unauthorised organisations or individuals wishing to publish a financial promotion have two options. They can either:
- choose to communicate it only to persons and in circumstances falling within an FPO exemption, or
- they can seek the approval of an authorised firm for the content of their financial promotion.
Authorised firms, by virtue simply of their authorised status, may approve financial promotions concerning any financial product or service, irrespective of the scope of their regulatory permission or whether they have expertise relevant to the product or service in question.
What are the proposed changes?
Firstly, what will not change. Unauthorised firms may still rely on the FPO exemptions to communicate unapproved financial promotions. Also, authorised firms may still communicate their own financial promotions.
It is the regulatory framework for authorised firms approving financial promotions that will change.
Authorised firms wishing to approve financial promotions will, under the new regulatory framework, have to pass through a new regulatory “gateway”. All authorised firms will be prohibited from approving the financial promotions of unauthorised persons, by way of the imposition of a requirement on their permission (the “Financial Promotion Requirement”).
Firms that wish to approve financial promotions will have to apply to the FCA to have the prohibition 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 what is known as a variation of requirement (VREQ) application to the FCA, who will determine such applications in accordance with Part 4A FSMA.
There will be a some exemptions to the gateway, for authorised firms approving financial promotions for other members of their group and for principals approving financial promotions for their appointed representatives in relation to regulated activities, for which the principal has agreed to accept responsibility.
What are the consequences of the proposed changes?
An unauthorised firm seeking an authorised firm to approve their financial promotion will need to check that the authorised firm is not prevented from doing so by virtue of their Financial Promotion Requirement. The FCA will consider what changes may be needed to the financial services register.
If an unauthorised firm were to publish a financial promotion approved by an authorised firm that was not permitted to do so, the unauthorised firm would commit a criminal offence. (The authorised firm in that circumstance would commit a regulatory breach). Further, if section 21 has been breached then any agreement entered into as a result of the unlawful financial promotion may be unenforceable.
There will be a transitional period. Authorised firms who apply during the application window before the start of the transition period to continue approving financial promotions will be able to carry on with such approvals during the transition period. Thereafter they will only be able to approve financial promotions if their VREQ application were successful.
The legislation that will bring into effect the new regulatory framework will be brought forward when parliamentary time allows. Thereafter the FCA will consult on its proposals for implementing the gateway and will announce final rules once it has considered the consultation responses.
A considerable majority of respondents supported the gateway. The main justification for supporting the gateway was that the requirements on approver firms are currently too low and more action is needed to encourage due diligence. A regulatory gateway which would lead to a specific assessment of firms’ suitability to approve financial promotions, and improved supervision was seen to achieve this.