FCA introduction of new regulatory gateway for firms which approve financial promotions

Background

Under section 21 of FSMA, currently any firm that is authorised under the Financial Services and Markets Act 2000 (FSMA), may approve a financial promotion by another unauthorised person. However, the government is concerned that the current framework is no longer sufficient and gives rise to risks. The FCA is particularly concerned with the promotion of high-risk investments and ‘Buy-Now Pay Later’ (BNPL) products. The FCA has seen examples of promotions that do not warn consumers of the risks, such as the taking on of debt, missed payments and other consequences. The FCA has also identified cases where firms are approving financial promotions for products which are unrelated to the firm’s permission and expertise.

As such, the regulatory gateway is intended to enable the FCA to assess firms’ suitability and competence, including whether firms have the necessary expertise to approve financial promotions. The FCA considers that the regulatory gateway will help support the approach of the new Consumer Duty to ensure that the financial promotions that firms approve support retail consumers’ understanding of the products/services that they are purchasing.

Financial Promotion Requirement (FPR)

The regulatory gateway imposes the new ‘Financial Promotion Requirement’ on all existing and newly authorised firms. Only firms that apply for the ‘gateway permission’ and receive approval will be able to approve financial promotions from unauthorised persons. Consequently, an unauthorised person will only be able to communicate financial promotions approved by a firm with gateway permission or where it is able to rely on an exemption.

Exemptions

On 06 September 2023, the Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023 were published. This instrument legislates to exempt authorised persons from the requirement to obtain permission through the new financial promotions gateway where:

• The authorised person that approved the communication also prepared the content of the communication;
• The unauthorised person prepared the content of the communication and is in the same group as the authorised person approving the communication; or
• The content of the communication is prepared by an appointed representative (that is, the unauthorised person) in related to any activity for which the authorised person has accepted responsibility and has approved the communication.

This legislation seeks to accomplish its intended policy goal by exempting authorised persons from the obligation to pass through the financial promotions gateway, in the aforementioned  circumstances, where they wish to approve unauthorised persons’ promotions. It will come into force on 27 September 2023.

However, unauthorised persons can continue to communicate financial promotions without the approval of an authorised firm where they are able to rely on existing exemptions such as those relating to ‘high net worth individuals’ and ‘self-certified sophisticated investors’. However, the government has consulted on proposed reforms to these exemptions which, if legislated upon, may lead to an increase for approvals by authorised firms.

Transitional Period

A transitional period will run from 06 November 2023 until 06 February 2024, as outlined in the recently published Financial Services and Markets Act 2023 (Commencement No 2 and Transitional Provisions) Regulations. This will allow for an easier transition between the old and new regime. Firms that apply for a gateway permission during this period will be able to keep approving financial promotions while their gateway application is being assessed by the FCA.  The FCA may then approve the permission on the requested terms or impose additional conditions that it considers necessary. The FCA also reserves the power to vary or cancel the permission at any time. It is therefore evident that the new financial promotions regime provides the FCA with significantly enhanced supervisory authority in comparison to the previous system.

From 07 February 2024, if a firm applies for gateway permission, it will no longer be able to approve financial promotions (other than within an exemption) until its application is determined.

The key points

PS 23/13 goes into extensive detail with respect to how the FCA will operationalise the regulatory gateway. It also brings forth minor changes to the framework initially outlined in CP 22/27. Further information with regards to applying to approve financial promotions for unauthorised persons is set out on this FCA webpage, and the questions that applicants will be asked in the application are listed in Annex 1 and 2 of PS23/13. The near-final rules laid out within PS 23/13 are as follows:

Assessment of applicants at the regulatory gateway

Firms will need to apply to the FCA for a gateway permission under either (a) a variation of their existing permission or (b) as part of their application for authorisation. The FCA will assess applications by reference to its operational objectives and the Threshold Conditions set out under FSMA. In summary, firms will need to demonstrate that:

• they have considered the commercial viability of the product/service described in the financial promotion they approve;
• they have assessed if there are any fees, commissions and other charges within the investment’s structure that could materially impact the ability of the product provider to deliver what has been advertised;
• they employ individuals with sufficient competence and expertise to approve financial promotions which should relate to investment types broadly within the firm’s existing Part 4A permission;
• they have the necessary systems, controls and processes in place to ensure the financial promotion is fully compliant with FCA rules, including the ability for ongoing monitoring, amendment and withdrawal of an approved financial promotion; and
• they have adequate procedures relating to the record keeping of the financial promotions that they approve.

A firm’s gateway application must detail the type of financial promotion it is seeking to approve, such as whether it is relating to designated investment business, general insurance business, retail banking services, or consumer credit. If the type of financial promotion sought differs from the firm’s Part 4A permission then the firm’s gateway application will be subject to more scrutiny from the FCA.

In assessing a firm’s gateway application, the FCA will give consideration to a number of factors such as the information provided by the applicant, market research, complaints data and FCA’s own experience in supervising the applicant firm. Firms applying for gateway permission are therefore encouraged to consider the FCA’s guidance for approving financial promotions before applying.

FCA basis for granting or refusing gateway applications

The FCA will reject a gateway application to advance one or more of its operational objectives. However, the FCA may grant an application for gateway permission on different terms than set out in the application or in relation to a narrower range of investment types of financial promotions.

If a firm’s gateway application is refused, it will be able to make its representations and ultimately refer the matter to the Upper Tribunal.

A firm’s gateway permission, once approved, can be varied or cancelled by the FCA, either through a voluntary application of the firm or the FCA’s own-initiative powers.

Notifications to the FCA on approval, amendment, and withdrawal of financial promotions

A firm with gateway permission will be required to notify the FCA each time the firm:

• approves a financial promotion relating to a product subject to a retail mass-marketing ban (i.e., non-mainstream pooled investments and speculative illiquid securities) or a qualifying crypto asset investment, stating the product name, product type, the name of the unauthorised firm whose product is the subject of the financial promotion; and
• approves amendments to, or withdraws an approval of, a promotion due to a ‘notifiable concern.’

The above data together with other information the FCA will collect will help the regulator monitor approval activity and the standard of approvals as well as inform its supervisory approach.

Reporting requirements

Firms with gateway permission that are approving financial promotions will also be required to submit bi-annual reports to the FCA in respect of the:

• total number of approvals (to be broken down by (i) the types of products being promoted and (ii) ‘marketing restriction’ categories that apply to the promoted products, if applicable);
• total number of consumer complaints for approved financial promotions;
• revenue from approval activity; and
• total revenue from regulated and unregulated activities.

The first bi-annual report will need to be submitted within 30 business days following either a firm’s accounting reference date (ARD) or the date falling 6 months after the firm’s ARD, whichever date falls first after the transitional period expires. A firm that applies during the initial application period will be required to begin complying with the notification and reporting requirements when the transitional period has begun.

Compulsory jurisdiction of the Financial Ombudsman Service and compensation

At present, complaints about the approval of financial promotions are not covered by the Financial Ombudsmen Service (FOS), and the FCA has no plans to extend FOS’ compulsory jurisdiction to bring approval of financial promotions within its remit.

The Financial Services Compensation Scheme is also not available for redress for claims based on a complaint regarding the approval of a financial promotion.

Handbook guidance

The FCA has published an updated version of its guidance (PS22/10) on the rules for financial promotions, including the near final Handbook rules outlined in PS 23/13. The near final rules explain some practical implications on assessing financial promotions to ensure promotions comply with chapter 4 of the Conduct of Business Sourcebook.

Consumer Duty

A firm’s responsibility under the Consumer Duty will need to be considered during the process of approving financial promotions of unauthorised persons. Firms need to ensure each promotion:

• meets the information needs of customers;
• is likely to be understood by customers intended to receive them; and
• is capable of equipping customers to make effective decisions.

Financial promotions will also need to be tailored to consider characteristics such as a customer’s vulnerability or the product’s complexity.

Screening Checks to Approve Financial Adverts

The FCA has announced that it is introducing new screening checks for authorised firms that approve financial adverts for unauthorised persons in a bid to bolster the financial promotion regime. Authorised firms must demonstrate their proficiency in evaluating adverts, understand the product in question, ensure the promotion is accurate and equitably balances risk and reward. Additionally, authorised firms must routinely update the FCA on the adverts they approve and those for which they withdraw approval. This is intended to assist the regulator in supressing problematic promotional material. It is clear that these reforms are driven in part by the FCA’s new Consumer Duty, which aims to set higher standards of consumer protection across financial services.

As discussed above, firms that apply for a gateway permission may continue to approve financial promotions between 06 November 2023 and 06 February 2024. 

Proposals for New Social Media Guidance

In July 2023, the FCA launched a consultation (GC23/2) on its proposed social media guidance in a bid to clarify what is required of firms when marketing financial products on social media. Advertising trends suggest that social media platforms are now being used as a ‘go-to source of information’ when it comes to financial decision making. Therefore, the FCA is looking to set clear expectations in this space in order to reduce the volume of illegal or non-compliant financial promotions and to ensure that firms deliver good outcomes for retail customers in line with the Consumer Duty.  

The consultation closed on 11 September, and we expect the finalised guidance to be published in due course.

Impact On Firms

These changes, together with the new rules on financial promotions of high-risk investments (see our summary here) represents a significant change from the current financial promotions regime. Unless authorised firms can rely on an exemption from the requirement for a gateway permission, authorised firms wishing to approve financial promotions of unauthorised persons must apply for a gateway permission and once granted, undertake enhanced due diligence on each promotion and comply with ongoing reporting requirements.

The new financial promotions gateway, alongside the introduction of screening checks and new social media guidance, will result in higher compliance burden and take up additional resources. Firms will have to consider if and how they will be able to provide approval services to unauthorised persons going forward. Conversely, the number of firms providing approval services may drop and as such, demand for approval activities may rise for firms that are successful at the regulatory gateway.

Next Steps

The changes ushered in by The Financial Services and Markets 2023 have already begun to alter the landscape of the UK financial promotion regime. Although numerous provisions are yet to be finalised by the FCA, PRA and/or HM Treasury before coming force, the implementation process is now underway. The FCA has stated that it will conduct a review of its approach within 24 months of the regime coming into force. In the meantime, affected firms are advised to consider how the above requirements will impact their activities in applying to continue to approve financial promotions for unauthorised persons and to monitor ongoing developments in respect of financial promotions.  

This article was first published in Reuters Regulatory Intelligence.

Article update co-authored by Abbie Douglas