On the 5th day of Christmas HMT gave to me 5 revisions to the fin prom regime
20 December 2021
20 December 2021
On 15 December 2021, HM Treasury published a consultation paper outlining five proposed revisions to the financial promotion exemptions for high net worth (HNW) individuals, sophisticated investors, and self-certified sophisticated investors.
HM Treasury is of the view that while financial promotion exemptions are important and should be retained (especially to facilitate capital raising for SMEs), thresholds for exempt investors should be recalibrated to reflect investor's experience or their ability to absorb losses, revisions are required to help ensure exempt investors understand the regulatory protections they are losing and that investors can take responsibility for their investment decisions, and revisions are required reduce the risk of firms mis-using the exemptions (as is the case with some firms, particularly unauthorised firms today).
The five proposal aimed at achieving the above purposes are:
The scope of the exemptions remain unchanged. For example, the HNW individual and self-certified sophisticated investor exemptions only apply to investments in unlisted companies, whereas the sophisticated investor exemption applies to more instruments. This does not change.
In addition, the revisions apply to exemptions relating to the promotion of both investment activities and collective investment schemes.
The Government also understands that a number of overseas firms which rely on the overseas persons exclusion (OPE) also rely on the HNW individual and sophisticated investor exemptions in order to undertake regulated activities with UK clients by way of a "legitimate approach" (i.e. overseas firms may provide cross-border financial services in the UK without being authorised if the firm does not breach the FPO, for example by relying on an exemption). The consultation does not address the impact of the proposals on overseas persons, but the Government will consider responses from overseas persons as well as responses to its call for evidence for the overseas framework, when determining next steps.
The deadline for responses is 9 March 2021.
Under section 21 of FSMA, a person must be authorised by the FCA or PRA to communicate financial promotions, or where the person is unauthorised, have its financial promotions approved by an authorised person before they are communicated (unless an exemption applies). This is referred to as the "financial promotion restriction".
The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) includes a number of exemptions from the financial promotion restriction and include those for:
A similar restriction exists in section 238 of FSMA for the promotion of collective investment schemes, and there are exemptions in article 21, 23, and 23A of the Promotion of Collective Investment Schemes (Exemptions) Order 2001 (PCIS) which mirror the above FPO exemptions.
The purpose of these exemptions, when they were introduced in 2001, were to facilitate SME directly promoting investment opportunities to "business angels", as the cost of having a financial promotion approved by an authorised person were prohibitive in the case of SMEs seeking small levels of capital.
Currently, these exemptions are used for a wider purpose than originally intended.
The Government is aware of firms misusing the exemptions to market products (often higher risk investments) to retail investors. This ranges from firms undertaking superficial checks, to retail investors being coached to answer questions about the exemptions, so they are classified as HNW or sophisticated, when in reality they don’t meet the criteria, to statements investors are required to sign being hidden in significant amounts of information, in which investors are told to sign the statements as a formality without any real explanation as to what it means or the regulatory protections the consumer is giving up.
HNW individuals are those who certify that they have earned a net income of £100,000 in the previous year or hold net assets of at least £250,000.
The Governments is proposing to increase the net income threshold to £150,0000 and the net assets threshold to £385,000. The Government is not proposing to change the assets in scope of the net asset calculation.
Reasons for these proposals include:
We do not consider this proposal further.
There are different tests which if an investor meets, would qualify them as a sophisticated investor.
The Government is proposing to: (a) remove the test that allows an investor to be treated as sophisticated if they made more than one investment in an unlisted company in the previous two years; and (b) amend 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 with an annual turnover of at least £1 million. The threshold will be increased to £1.4 million in line with inflation.
With respect to (a), in 2005, when the exemption was introduced, investors would have only been able to invest in unlisted securities through a broker. This is no longer the case given online investing and crowdfunding platforms, evidenced by the fact that at least 1.6 million consumers hold investments in unlisted companies (according to the FCA Financial Lives Survey 2020). Therefore this is no longer an indicator of investor sophistication.
The Government is not currently proposing a replacement for this test but would welcome views from stakeholders.
There is no obligation on firms to check that an individual meets the HNW or sophisticated investor criteria. The Government proposes to shift some of this evidential burden to firms so that they must have a reasonable belief that an individual meets the HNW or sophisticated investor definitions, and document how they've come to this conclusion accordingly.
The Government also proposes that firms be provided to provide their address, contact details, and if appropriate Companies House number or equivalent in any communications using the exemptions.
Reasons for these proposals include:
As discussed above, some investors do not understand or engage with the information presented to them, including statements investors are required to sign to be classified as HNW or sophisticated. As a result, some investors may incorrectly certify themselves, or do not understand the regulatory protections they are giving up.
The Government proposes making three substantive changes to investor statements to remedy these problems:
HM Treasury's proposals follow a swathe of publications, hinting at material reforms to the marketing of (high risk) investments to retail clients:
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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