By Natalie Stewart & Drew Salvest
HM Treasury has opened a consultation regarding a regulatory gateway for authorised firms approving the financial promotions of unauthorised firms. Responses to the consultation are sought by 25 October 2020 and the government is particularly interested in responses from authorised firms currently approving the promotions of unauthorised persons, retail consumers and unauthorised persons which communicate financial promotions. Unauthorised firms who rely on authorised persons to enable them to market products in the UK should consider approaching their usual approving firms to ensure any implementation of this consultation does not inhibit market access.
Regulatory Background
Financial promotions (“Promotions”) are restricted under Section 21 of the Financial Services and Markets Act 2000 (“FSMA”), pursuant to which a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the Promotion has been made or approved by an authorised person or it is exempt. Unauthorised firms often use authorised firms which are authorised to carry on a regulated financial services activity to approve their Promotions in order to comply with the regulations (the “Authorised Persons Approval Route”).
Authorised firms are not required to notify the Financial Conduct Authority (the “FCA”) once they have approved an unauthorised firm’s Promotion, nor does the FCA sign off on approved Promotions before they are communicated to consumers. As such, the FCA is only made aware of potential breaches of the relevant regulations.
Market Background
The FCA is concerned that additional safeguards may need to be put in place into order to ensure that the Authorised Person Approval Route meets the minimum standards necessary to protect consumers and to ensure that all Promotions are “fair, clear and not misleading”. The FCA cites instances where approving firms have failed to undertake due diligence on the Promotions they are being asked to approve, and where Promotions have been approved which relate to products outside the expertise of the approving firm. The FCA has an increasing focus on consumer protection, in part due to the failure of London Capital and Finance in January 2019 (and their issue of mini-bonds to consumers), the current low interest rate environment resulting in consumers looking to riskier financial products for higher returns, and the increased scope for Promotions to reach consumers through online marketing channels.
Problems with the existing regulatory framework
Under the current regime, authorised firms are not assessed as to their capability to provide the Approved Person Approval Route to unauthorised firms before such approval has taken place. The FCA identifies three risks arising from this: (1) lack of relevant approved firm expertise (in specific product areas), (2) lack of approver firm due diligence and firms not having enough information to properly assess Promotions, and (3) challenges in the FCA being able to exercise appropriate regulatory oversight, as the FCA does not currently have a comprehensive and exhaustive list of approver firms nor the nature of Promotions being advertised and how they relate to the authorised firms’ area of expertise.
Proposed Solution
The government has proposed a regulatory gateway, in order to ensure that authorised firms meet certain suitability and competence standards before they can approve unauthorised firms’ Promotions. The consultation only relates to the use of Promotions by unauthorised firms, and does not relate to Promotions by authorised persons.
The regulatory gateway would enable: (1) more effective FCA oversight and supervision, (2) more effective prevention and intervention, (3) a method for the FCA to ensure approver firms have the relevant expertise required, and (4) improved due diligence.
Implementation of Proposed Solution
The FCA has asked market participants to consider two potential solutions as part of the consultation:
(1) An amendment to section 21(2)(b) of FSMA, in order that unauthorised persons are only able to communicate their own Promotions if they have been approved by a firm which has obtained consent from the FCA to provide such approval. It has been suggested that in determining the fitness and competence of each authorised firm to be able to approve Promotions, such approval could be linked to products or services within the firm’s area of expertise.
(2) An amendment to Regulated Activities Order and amendment to section 21(2)(b) of FSMA, such that the approval of Promotions of unauthorised persons would become a regulated activity (which would require firms to have Part 4A FCA permission).
If you have any questions about this blog, please contact Drew D. Salvest, Natalie A. Stewart, any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.