On 21 July 2020, Government announced proposals which will significantly narrow the circumstances in which an authorised firm can approve the financial promotions of an unauthorised firm.
The Government is consulting on the following:
- a process (referred to as a "gateway") whereby FCA consent will be required before an authorised firm can approve an unauthorised firm's financial promotions; or
- specifying that the approval of financial promotions communicated by unauthorised persons is a Part 4A "regulated activity" (which firms would need to have permission for before performing).
The proposals do not affect the way authorised firms communicate their own financial promotions, approve their own financial promotions for communication by unauthorised persons, or approve the financial promotions of an unauthorised person within the same corporate group.
The proposals in more detail
Section 21(2)(b) of FSMA permits authorised persons to approve the financial promotions of unauthorised persons (including for a fee). Due to the low interest rate environment, demands for higher yield (and complex) products are increasing, particularly from retail investors. The Government recognises that these products are often issued by unauthorised persons (such as mini bonds), in respect of which the financial promotions are approved by authorised persons. The Government considers that the increased prevalence of online marketing channels means that misleading financial promotions can quickly reach a mass audience.
Notwithstanding the changing financial promotion and retail investment environment, the nature of regulatory supervision in this area is still reactive. The FCA is focussed on investigating potential breaches of financial promotion rules, which have been identified through online reporting forms, via calls made to the FCA contact centre, or through information gathered in the course of the FCA's general supervisory activity.
The Government believes that the current financial promotions rules do not adequately safeguard consumers, nor do they address the following risks that:
- approving firms can lack expertise in relation to the third party products or services being promoted;
- approving firms often conduct inadequate (or no) due diligence on the third party products or services being promoted. For example, the FCA has identified cases where approving firms did not assess whether the rates of return advertised in the promotion were reasonably capable of being achieved; and
- appropriate oversight of approving firms is challenging because the FCA does not have a comprehensive and exhaustive view of the approving firm's systems and controls in relation to approving third party promotions, or an up-to-date understanding of the approving firm's expertise in relation to the third party product or service being promoted.
It would be impractical to require all approving firms to notify the FCA every time they approve a financial promotion, or for the FCA to check all approved promotions before they are communicated. Instead, it would be more effective to introduce a regime whereby the FCA could pre-assess and pre-approve the suitability and competency of approving firms. To this end, the Government is seeking to implement one of the following policy options.
- Option 1: removing the general ability of authorised firms to approve financial promotions of unauthorised firms. This would involve amending section 21(2)(b) of FSMA. Authorised firms will have to obtain separate FCA consent to become an 'approving' firm (the Government refers to this as the 'gateway'). However, it is unclear whether the approval process applies once, on a per 'approving' relationship basis, or on a per product / service basis.
- Option 2: specifying the approval of financial promotions communicated by unauthorised persons as a "regulated activity", which firms could apply for as a Part 4A permission. This would involve amending the Regulated Activities Order as well as amending section 21(2)(b) of FSMA. Either way, only firms which have either passed through the 'gateway' or have the relevant permission to conduct the 'regulated activity' would be able to approve financial promotions of unauthorised firms.
This is an important development, particularly for firms who currently approve unauthorised firms' financial promotions (and should be considered in light of the future need, in particular, of third country firms who are marketing products in the UK).
The consultation closes on 25 October 2020.
Author: Emma Tran
