Changes to the financial promotions exemptions regime: HM Treasury confirms its final position

HM Treasury has issued a response to its December 2021 consultation on the proposed revisions to the financial promotion exemptions for certified high net worth individuals, sophisticated investors and self-certified sophisticated investors (see our briefing here). These are set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). The regime will result in changes to relevant investor statements. Firms relying on these exemptions will need to update their policies and procedures to ensure that they are prepared to comply with the new regime.

Work by the Government in this area forms part of wider initiatives to update the regulatory framework in relation to the UK regulatory framework for financial promotions - such as the financial promotions approval gateway (see Ashurst briefing), which was legislated for in the Financial Services and Markets Act 2023 (see our briefing here),  and the updated FCA rules for high risk investments (see our briefing here).

Background

The exemptions contained in the FPO were originally introduced to allow SMEs to raise finance from high net worth individuals without having to comply with the financial promotions regime. The changes proposed in the consultation were designed to reflect economic, social and technological changes that had taken place since the introduction of the exemptions in 2001. There were also concerns that the existing regime was being used by some businesses to markets unsuitable investments to ordinary retail investors. 

The changes to the FPO will be effected via the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023. 

Key changes 

• Increasing the financial thresholds to be eligible for the high net worth individual exemption to: income of at least £170,000 in the last financial year (up from £100,000); or net assets of at least £430,000 (up from £250,000) throughout the last financial year. The Government has made slight amendments in respect of the final figures (original figures proposed were £150,0000 for the net income threshold and £385,000 for the net assets threshold). Respondents were in agreement with the proposal to increase the thresholds in line with inflation.
• Removing the test allowing an investor to be treated as sophisticated where they made more than one investment in an unlisted company in the previous two years; and increasing the annual turnover threshold in the test that allows an investor to be treated as sophisticated if, in the last two years, they have been a director in a company (up from at least £1 million to at least 1.6 million). The majority of respondents were in agreement with the Government that the criterion of having made more than one investment in an unlisted company in the previous two years was no longer an indicator of sophistication. The Government had initially proposed turnover of £1.4 million but has slightly amended this to £1.6 million and considers that this indicates business success and sophistication and will exclude less experienced directors. It considered that the existing £1 million threshold had been devalued by inflation.
• Requiring businesses to provide details of themselves in any communications made using the exemptions to include company address, contact information and the company's registration details. The Government is hoping that this will assist prospective investors carrying out basic due diligence on persons marketing investments. It also considers that it could assist FCA oversight of non-compliance with the exemptions.
• Updating the title of the certified high net worth individual exemption by removing "certified", as the Government considers that this will reduce the chance of those lacking sufficient experience/expertise to certify themselves as sophisticated.
• Updating the high net worth individual and self-certified sophisticated investor statements to encourage investors to engage more actively with the content in the investor statement before signing; simplifying language in the statements; and updating the format. Changes to the format will include moving the conditions in relation to high net worth or sophisticated investor from the bottom of the statement to the top and making it clear that financial promotions made under the exemptions may not follow FCA rules/enjoy usual protections. The updated statement will require any prospective investor to choose the specific criterion they meet in order to be classified as high net worth/sophisticated and to outline how they meet it. Templates for the new investor statement for high net worth individuals and self-certified sophisticated investor are contained in the document. 
• Applying the changes to the equivalent exemptions for promotion of collective investment schemes set out in the Promotion of Collective Investment Schemes (Exemptions) Order 2001.

In light of considerable opposition from respondents, the Government has decided against its proposal of introducing a requirement for firms to believe on reasonable grounds that an investor meets the high net worth or sophisticated investor definitions and to document how they've came to this conclusion. This was designed to place greater responsibility on businesses to ensure that individuals meet the criteria. The Government now considers that changes it has made to the existing regime can address concerns it had in this area.

Next steps

The Government intends that changes will be brought into force on 31 January 2024. The SI also contains separate amendments to the scope of the exemptions from the financial promotions gateway. New financial promotions made from 31 January 2024 will need to be conducted in accordance with the updated exemptions (even when made to individuals already promoted to under the current exemptions). In accordance with Article 14 of FPO, a business making a financial promotion to an individual before 31 January 2024 in compliance with the exemptions will continue to be able to engage with the relevant individual in relation to the financial promotion made and will not be required to request an updated investor statement.