Context and background

The financial promotions regime (FPR), which operationalises the financial promotions prohibition (FPP),¹ has long been out of step with its more restrictive sister, the general prohibition regime.²

Until recently, unauthorised firms could sidestep the FPP by having the promotion approved by an authorised firm, a Financial Promotions Approver (FPA). Unlike the general prohibition, which restricts the regulated activities a firm can carry out to the specific activities and investments covered by its Part 4A permissions, under the FPP an FPA could technically approve a financial promotion relating to any controlled activity or investment, even where the FPA has no expertise in the area to which the financial promotion applies.³ This creates possible consumer harm where information in inducements or invitations to invest is inaccurate due to a lack of technical expertise on the part of the FPA.

The Financial Conduct Authority (FCA), which polices the regime, and HM Treasury have pursued a long programme of consultation⁴ and reform designed to address these possible harms. The reforms to the FPR in the Financial Services and Markets Act 2023 (the Act) are the culmination of this work and seek to tighten the regime in order to strengthen consumer protection. These most recent reforms become effective on 7 February when a new regime, complementing the explicit self-assessment requirements under COBS Chapter 4 introduced in 2023 for firms that approve or communicate a financial promotion relating to an investment services or product,⁵ will come into force. Firms that operate within the FPR, and indeed utilise financial promotions, need to be aware of the effect of the reforms and, if they have not considered the possible impact of the new regime, need to act before 7 February. The application window for existing FPAs to apply for FCA approval opened on 6 November 2023 and will end on 6 February 2024.⁶

This is particularly important because a person commits a criminal offence under section 25 of FSMA if they carry on activities in breach of the FPP. A person guilty of this offence is liable to a maximum of two years' imprisonment and unlimited fine.⁷

Current system for approval of financial promotions

The overarching standard enshrined in the current FPR is that all financial promotions must be fair, clear and not misleading.⁸ This means that FPAs play an important role in ensuring the promotions they communicate and approve accurately represent the product or service promoted, particularly on matters that are relevant to helping consumers make informed decisions, such as risk and return. To confirm this, an FPA should consider both:

• the presentation of the promotion (e.g. whether the risk warnings are given sufficient prominence); and
• the substance (e.g. the fairness and veracity of claims made and whether these can be substantiated).

An FPA should only approve a financial promotion for communication by an unauthorised firm, if it is satisfied that the financial promotion complies with the FCA's financial promotion rules.⁹ If an FPA becomes aware that an approved financial promotion no longer complies with the financial promotion rules, they must withdraw approval and notify anyone they know who is relying on the approval. The challenge for FPAs unfamiliar with particular types of product is understanding the product sufficiently to assess the risks and rewards and the fairness and veracity of claims.

Where the FCA identifies a financial promotion which has been approved by an authorised firm that does not meet its requirements (including approvals by an FPA), there are a range of actions available to it. These include, for example:

• asking the firm to ensure that the financial promotion is changed or withdrawn;

• directing the firm to withdraw its approval of the financial promotion using the power in section 137S of FSMA; and/or

• opening an enforcement investigation which, if serious misconduct is found, may lead to enforcement action such as a financial penalty.

Non-compliant financial promotions are now the domain of the Financial Promotion and Enforcement Taskforce (FPET) launched in October 2021. The FPET combines parts of the FCA's Supervision and Enforcement divisions. Blending the skills and experience across these teams is understood to have led to increased and earlier interventions.¹⁰

Potential harms within the existing FPR

Generally, the FCA expects FPAs to have persons with relevant competence and expertise (C&E) assess the promotion before approving or communicating it (see PRIN 2, SYSC 3.1.6 R and SYSC 5.1.1 R in this regard). However, historically there was no requirement for firms to have the relevant C&E and there was evidence that too many promotions were being approved by firms that failed to understand the FCA rules in particular areas, which meant they were approving misleading promotions.¹¹ In its policy statement PS23/13, the FCA identified that "consumers are often targeted with adverts that are unclear, unfair or misleading" which can "lead consumers to access products that do not suit their circumstances".¹² As the FCA noted, readily available, but misleading, information undermines both consumers' ability to make good decisions about investments and the principle that consumers should take responsibility for their decisions.¹³ The FCA further noted that an increasing number of financial promotions were being amended or withdrawn, which emphasised the scale of the challenge.¹⁴

These problems, and the limit of the FCA's existing powers to police the FPP, have recently been highlighted in a couple of areas:

• in relation to buy-now-pay-later (BNPL), where there was evidence that promotions did not prominently warn consumers of the risks.¹⁵ In August 2022, the FCA wrote to the British Retail Consortium and warned BNPL firms via a Dear CEO letter that, although (for now) the agreements themselves may be unregulated, the financial promotions of all BNPL products must comply with the requirements of the financial promotion regime; and¹⁶

• in July 2023, the FCA launched a consultation into guidance to be issued on the application of the financial promotions requirements to social media. Prior to this, in April the FCA published an infographic in conjunction with the Advertising Standards Agency (ASA) to "finfluencers". The infographic, which saw the FCA and ASA join forces with a former reality TV contestant and social media influencer, highlighted the risks of finfluencers falling foul of the FCA's and ASA's respective regulatory frameworks.¹⁷ The regulator has also taken steps to engage with many of the largest search engines and social media platforms, including Google and Meta, in order to implement new financial services verification policies that only allow financial promotions that are made by, or with the approval of, authorised persons.¹⁸

The consumer duty, and particularly the consumer understanding outcome, has introduced another layer of diligence to the FPA process. The consumer duty requires firms to build upon the core requirement for communications to be fair, clear and not misleading. Principle 12 and PRIN 2A, including the cross-cutting rules, apply to a firm communicating or approving financial promotions which are likely to be received by retail customers. As a result, FPAs need to ensure that the financial promotions they approve support retail consumers' understanding and deliver good outcomes.

However, the tools utilised by the FCA in relation to the FPR remained not entirely effective in ensuring that consumers had the information that they required to make good decisions.

Reform of the regulation of financial promotions to prevent identified harms

The Act amends the FPR and paves the way for a new regime for FPAs: section 20 of the Act inserts new sections 55NA and 55NB into the FSMA, which introduces a new sub-regime for FPAs. The effect of these new provisions is that authorised firms can only approve financial promotions where either expressly granted permission to do so by the FCA with respect to that promotion type, or where the approval falls within the scope of an FPA exemption (the Gateway).

In addition, in November 2023, HM Treasury announced additional changes to tighten commonly used exemptions enabling promotions to "high net worth individuals" (Article 48 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) and self‑certified "sophisticated" investors (Article 50A of the FPO).¹⁹ The updated exemptions will:

• raise the financial thresholds to qualify for the high net worth individual exemption to account for inflation, so that an individual must have:

• income of at least £170,000 (raised from £100,000) in the last financial year; or
• net assets of at least £430,000 (raised from £250,000) throughout the last financial year;

• amend the eligibility criteria for the self-certified sophisticated investor exemption by:

• removing the requirement of having made more than one investment in an unlisted company in the previous two years; and
• increasing the company turnover required to satisfy the "company director" criteria to £1.6 million (i.e. directors of companies with at least £1.6 million turnover will remain eligible for the self-certified sophisticated investor exemption);

• require businesses to provide details of themselves in any communications made using the exemptions;

• tighten other eligibility criteria to reduce the risk of capturing ordinary consumers;

• strengthen the statements that investors are required to complete when using the exemptions;

• update the title of the certified high net worth individual exemption by removing "certified"; and

• apply these changes to the equivalent exemptions for promotion of collective investment schemes.

The new Gateway

In accordance with new section 21(2A) of FSMA, an authorised person is unable to approve the content of a communication for the purposes of the FPP unless:

• the firm has FPA permissions in relation to the financial promotion type; or

• an approver permission exemption applies.

The new FPA Gateway Regulations, which entered into force on 27 September 2023, introduced a handful of key exemptions from the requirements of the Gateway.²⁰ The FPA Gateway Regulations allow an authorised person to approve a financial promotion where the content has been prepared by:

• themselves (i.e. by that authorised person for communication by an unauthorised person);

• its appointed representative (AR), under section 39(2) FSMA, in relation to any regulated activity comprised in the carrying on of the business for which the authorised firm, as the AR's principal, has accepted responsibility; and

• an unauthorised person within their corporate group.²¹

FPA authorisation

The Gateway requires new firms applying for Part 4A authorisation to also apply for FPA permissions if they wish to approve financial promotions and are not otherwise exempt under the FPA Gateway Regulations.²²

Existing authorised firms need to apply for new FPA permissions under the Gateway by submitting a variation of permissions. This is the same process that applies for a standard variation of permissions or cancellation. FPA permissions under the Gateway will be listed on the Financial Services register.

The FCA can refuse to grant FPA permissions under the Gateway where it considers it desirable to do so, to advance one or more of its operational objectives (protecting consumers, ensuring market integrity and promoting effective competition).

Separate to the FCA's power to grant, vary the terms of, or cancel FPA permissions, section 55NA(12) of FSMA confirms that the FCA may exercise other powers to restrict a firm's ability to approve financial promotions beyond the restriction imposed by section 55NA. For example, the FCA may exercise its power to impose requirements under section 55L of FSMA to restrict a firm's ability to approve financial promotions for which it would not otherwise require approver permission.

Firms seeking authorisation under the Gateway need to demonstrate that they have adequate systems, controls and processes in place to continue to satisfy the threshold conditions. The approval process also requires firms to detail the type of financial promotions they are seeking to approve. Applications will be assessed by reference to the relevant FCA rules to which the promotion type is subject.

The FCA has indicated that it would typically expect FPA applicants to seek permissions broadly in line with their Part 4A permissions. Where firms apply for FPA permissions of investment types beyond their Part 4A permissions, the FCA has said it will scrutinise the systems and controls the firms will need to maintain to ensure compliance of those promotions more closely.

The FCA has provided an illustrative list of thresholds a firm applying for FPA permissions of investments will need to meet during the authorisation process. These include, for example:

• that the FPA has adequate systems, controls and processes in place to ensure that the promotions which it approves comply with FCA rules;

• that the FPA has suitable policies and procedures for monitoring promotions and, where appropriate, withdrawing approval or requiring a promotion be amended;

• that the FPA has processes in place for maintaining adequate records of the financial promotions which the firm approves;

• how the FPA will record the way in which the promotion complies with applicable FCA rules;

• how the FPA will consider the commercial viability of the proposition described in the promotion;

• how the FPA will assess whether there are any fees, commissions or other charges within the investment's structure or elsewhere that could materially affect the ability of the product provider to deliver advertised or headline rates of return;

• that steps have been taken to identify whether, by approving financial promotions, there are any additional risks presented to the firm, and confirmation of how these will be mitigated; and

• that the firm has appropriate resourcing. This includes having sufficient individuals with appropriate competence and expertise, both to provide initial approval and then to monitor the compliance of approved promotions on a continuing basis, as well as clear lines of responsibility for approving a promotion.²³

FCA guidance says that where a firm intends to apply for: (i) Gateway permissions; (ii) a change to the terms (variation) of its Gateway permissions; or (iii) cancellation of its Gateway permissions, it should discuss its plans with its supervisory contact at the FCA as early as possible before making an application, in order to comply with Principle 11.²⁴

Application Period

The Commencement Regulations published on 24 August introduced an application period to allow existing FPAs to continue operating until their applications submitted under the Gateway have been determined.

Similar to the landing slots allocated under the temporary permissions regime for EEA firms that had relied on passporting, FPAs will have from 6 November 2023 to 6 February 2024 to apply for authorisation under the Gateway (the Application Period).

In accordance with Reg. 3(1)(a) of the Commencement Regulations, the Gateway will not apply to authorised firms that have submitted their application provided that the application has not subsequently been withdrawn or determined. As a result, unless exempt under the FPA Gateway Regulations, FPAs are not able to approve financial promotions until they have submitted their application under section 55NA(3)(a) of FSMA.

In the event a Gateway application is unsuccessful, authorised firms will need to immediately cease approving financial promotions where no corresponding Gateway exemption is available.

Where an authorised firm approves a financial promotion during the transitional period (from 7 February 2024 until the firm's application is determined), this will remain valid after the FCA determines its application under the Gateway. This will be the case even if the FCA refuses the application or the permission ultimately granted does not cover the relevant type of product. Any continuing obligations of the authorised firm for the approved promotion (such as ongoing monitoring) continue to apply even if the firm is no longer entitled to approve the relevant financial promotion because, for example, the FCA has rejected its application under the Gateway. The same principles apply to authorised firms that do not apply under the Gateway, but have approved financial promotions in the past, which are still being communicated. In this circumstance, if the authorised firm became aware that the financial promotion was no longer compliant with the financial promotion rules, it should withdraw its approval (as it could not approve amendments to the financial promotion).²⁵

Reporting and notification requirements

The FCA has expressed difficulties in its abilities to monitor firms' compliance with the financial promotions rules when there is no existing obligation to inform it that a firm acts as an FPA or provide it with details of the types of products and services a firm approves.²⁶ The changes in reporting requirements implemented under SUP 16.31 address these difficulties as the FCA takes clear and pointed steps towards its transition to being "a more data-led and assertive regulator".²⁷

Under the new ongoing reporting and notification requirements, the FCA will have access to up-to-date information on approval activity. The FCA hopes that access to such data will allow it to step in at an early stage to prevent any consumer harm.

FPAs are required to notify the FCA within one week using the FCA platform, Connect, when they:

• approve a financial promotion for a qualifying cryptoasset, or a product subject to a retail mass marketing ban;

• withdraw their approval of a financial promotion because of a notifiable concern; or

• approve amendments to a financial promotion because of a notifiable concern, such as failure to comply with the FCA rules.²⁸

These "real-time" information requirements are aimed at enabling the FCA to identify high-risk financial promotions quickly and emerging trends in unauthorised activity by providing it with access to data on approvals, amendments and withdrawals of approval.

In addition, the FCA will collect certain information on FPAs as part of its bi-annual reporting using the Regdata collection platform.²⁹ This will allow the FCA to receive data on volumes, types of products being promoted, the "market restriction" category that applies to the promoted products (if any), revenues and complaints in the FPA market to support it in its quest to identify high-risk FPAs.

The new notification and reporting requirements apply to newly authorised FPAs under the Gateway as well as existing FPAs that continue to approve financial promotions during the transitional period (from 7 February 2024 until the firm's application is determined).³⁰

Conclusion

In line with the FPA exemptions introduced through the Commencement Regulations, the majority of authorised firms are unlikely to be affected by the Gateway.³¹ Where the FPO exemptions are used, financial promotions are taken completely outside the FCA perimeter. Following the announcement of HM Treasury's proposals for reform, the FCA wrote to the Treasury Select Committee advocating that more extensive reform is needed to adequately protect retail investors if the exemptions are to be retained in legislation. The FCA expressed concerns that "ultimately, the continued presence of exemptions for high net worth individuals and sophisticated investors complicates the effective supervision of financial promotions and results in consumer harm that the FCA alone is unable to mitigate".³² As noted above, FPAs should keep abreast of any further guidance or rules provided by the FCA in its anticipated policy statement or any further publications from HM Treasury in light of its recent dialogue with the FCA.

If existing FPAs approving non-exempt financial promotions under the Gateway fail to apply to permissions at the beginning of the Application Period and/or a substantial number of applications are rejected, those that have submitted or obtained the requisite Gateway permissions may find themselves in a powerful position. Additionally, the cost may be prohibitive, particularly as, according to the FCA's own evidence, most of the authorised persons caught by the Gateway will be small firms. The FCA estimates that the cost of becoming compliant will be between £103,000 and £182,000 in the first instance, and then £40,000 to £532,000 per year thereafter.³³

FPAs will need to consider how they will meet the higher compliance burden, including possible additional resource, if they are to be on the right side of the possible reduction in FPA supply and increase in demand.

With the tightening of FCA rules for FPAs earlier last year, the introduction of the consumer duty and now the Gateway, firms who perceived the financial promotions approval pathway to be a chink in the armoury of the FPP may need to re-evaluate their existing arrangements.

We will have to wait and see whether authorised firms, who have acted as an FPA for unauthorised firms "on the side" to their main activities, decide the burden is too high and cease their FPA activities altogether.

1. Financial Services and Markets Act 2000 (FSMA), s. 21, which restricts a person's ability to communicate an invitation or inducement, in the course of business, to engage in an investment or claims management activity.
2. FSMA, s. 19.
3. However, authorised firms will be aware of the rules governing the self-assessment of competence and expertise at FCA's Conduct of Business Rules (COBS) 4.10.9A, 4.10.9B and 4.11.1(2B) introduced in February 2023; and the wider application of PRIN 2, SYSC 3.1.6 R and SYSC 5.1.1 R which are also relevant in this regard.
4. https://www.gov.uk/government/consultations/regulatory-framework-for-approval-of-financial-promotions.
5. See COBS 4.10.9A, COBS 4.10.9B and COBS 4.11.1 (2B).
6. Statutory Instrument: Reg. 2(4) of the Financial Services and Markets Act 2023 (Commencement No. 2 and Transitional Provisions) Regulations 2023/936 (Commencement Regulations).
7. It is a defence for a person to show that they took all reasonable precautions and used all due diligence to avoid committing the offence.
8. COBS 4.2.1 R.
9. COBS 4.10.2 R (1).
10. https://www.fca.org.uk/publications/annual-reports/perimeter-report.
11. Paragraph 1.5 of HM Treasury's Regulatory Framework for Approval of Financial Promotions: Consultation, July 2020.
12. Paragraph 1.10 of PS23/13.
13. Paragraphs 1.10 to 1.11 of PS23/13.
14. In 2022, 8,582 promotions by authorised persons were amended or withdrawn, an increase of 1,398% from 2021: Paragraph 1.13 of PS23/13.
15. In December 2020, for example, the Advertising Standards Agency banned several BNPL advertisements on the grounds that they "irresponsibly encouraged the use of credit to improve people's mood", and introduced guidelines requiring all providers to make clear that BNPL is a type of debt. (Reported by the Financial Times).
16. https://www.fca.org.uk/publication/correspondence/british-retail-consortium-bnpl-letter.pdf; and https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf.
17. https://www.fca.org.uk/multimedia/fca-and-asa-team-warn-finfluencers-risks-promoting-illegal-get-rich-quick-schemes.
18. https://www.fca.org.uk/publications/annual-reports/perimeter-report#lf-chapter-id-consumer-investments-new-regulatory-gateway-s21-gateway-.
19. Financial promotion exemptions for high net worth individuals and sophisticated investors. Consultation response, November 2023
20. Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023 (FPA Gateway Regulations).
21. Reg. 3 of the FPA Gateway Regulations.
22. The FCA can only grant an application for approver permission made by an applicant for Part 4A permission in the event that the applicant obtains authorisation.
23. https://www.fca.org.uk/publication/consultation/cp22-27.pdf. The areas that the FCA will have "particular regard to" when assessing an application under the Gateway are listed at SUP 6A.2.5.
24. SUP 6A.2.8 set out under Annex H of the FPAPI.
25. Paragraph 1.4 of PS23/13.
26. Paragraph 1.5 of the FCA Consultation Paper, CP22/27, "Introducing a gateway for firms who approve financial promotions" (CP22/27).
27. Paragraph 4.21 of CP22/27.
28. SUP 16.31.5.
29. SUP 16.31.9 – 11.
30. SUP TP14.
31. i.e. where authorised firms' approver activities are limited to their own financial promotions, financial promotions of group members, or activities of their appointed representatives on their behalf.
32. https://committees.parliament.uk/publications/42463/documents/211066/default/
33. Paragraph 3.21 of PS23/13.