UK Treasury publishes response to consultation on financial promotion approvals regulatory framework
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Partner
UK
I am a senior financial services regulatory specialist with a particular focus on advising firms who are digitally transforming the way financial services are being delivered.
Legal Director
UK
I am a Legal Director in our Corporate group in London where my current role includes a mix of client work, lawyer training, professional support, internal transactional work, and other firm project work.
Senior Associate
UK
I am an associate in the Banking and Finance team, advising clients within the financial services sector.
In July 2020, HM Treasury (the Treasury) sought the views of stakeholders on a regulatory framework for the approval of financial promotions (the Consultation). After reviewing the submissions, the Treasury has now published its response (the Response). In this article, we analyse the Response and consider the implications for the regulation of financial promotion approvals.
The Consultation
The Consultation stemmed from the view that existing safeguards around the authorisation of financial promotions were not sufficient to protect consumers. The current regime imposes a general restriction on communicating financial promotions (section 21 of the Financial Services and Markets Act 2000 (FSMA)). Firms authorised by the UK Financial Conduct Authority (FCA) are able to approve the financial promotions of unauthorised firms (section 21(2)(b) FSMA). The Consultation described concerns that certain financial promotions were failing to comply with FCA rules because authorised firms were not conducting sufficient due diligence and were approving promotions outside of their areas of expertise.
The Consultation proposed two options for reform. In the first, the FCA would impose a requirement on all existing authorised persons preventing them from approving the financial promotions of unauthorised persons (the Financial Promotion Requirement). Authorised persons could apply to have this requirement varied or cancelled. The second option was to specify approval of financial promotions by unauthorised persons as a ‘regulated activity’ under FSMA. Firms would then require a specific permission from the FCA to undertake this work.
The Response
A majority of respondents supported the notion that a gateway should be introduced for the approval of financial promotions of unauthorised persons. The first option, as described above, was preferred by those who responded. The Response goes into more detail about how this gateway will work in practice, addressing some of the concerns raised by respondents.
As above, the Financial Promotion Requirement will be imposed, and firms will have the ability to make a variation of requirement application to the FCA in order to remove the Financial Promotion Requirement either partially or in its entirety. The former will permit authorised firms to approve only specified types of financial promotions, whereas the latter will allow an authorised firm to approve all types. Firms will be permitted to make further such applications to vary the Financial Promotion Requirement.
Respondents to the Consultation suggested a transitional period for the implementation of the new gateway. The Treasury, agreeing with these suggestions, details its proposed three phases for introducing the new framework:#
- In the first phase, there is to be an application window in which firms wishing to continue to approve financial promotions can apply to do so. The current regime will continue to operate in this first phase.
- There will then be a transitional phase, during which those firms that submitted such an application will continue to be able to approve promotions as before. Firms that did not submit this application will no longer be able to do so.
- Finally, the third phase will begin upon the application of the new regime. At this point, only those firms that have successfully applied to have the Financial Promotion Requirement cancelled or varied will be able to approve financial promotions.
Under the new framework, an authorised firm that approves a financial promotion in breach of the Financial Promotion Requirement will be breaching a requirement under their Part 4A permission. Sanctions include censure, financial penalty, and permission suspension. HM Treasury believes that the recording of information about firms carrying out this type of activity will aid enforcement, which was another concern which led to and which was highlighted in the Consultation. The FCA will consider what information may need to be kept in relation to this new regime on the register that it maintains of authorised persons.
Respondents to the Consultation raised the issue of appointed representatives. In the Response, the Treasury proposes to exempt from the proposed gateway principals approving financial promotions for their appointed representatives, in circumstances where the principal has agreed to accept responsibility.
Feedback from the Consultation also suggested there was an appetite for firms that approve financial promotions as part of their core business to be grandfathered into the new gateway. The Treasury rejected this suggestion on the basis that the gateway includes a specific assessment of a firm’s suitability and capability of approving financial promotions. It considers that the transitional period will mitigate disruption to these firms in any case.
Next Steps
The UK government will need to bring forward legislation in order to implement the new gateway model. The FCA will undertake a further consultation on its proposals for implementing the gateway before publishing its final rules.
Firms that approve the financial promotions of unauthorised persons need not take any action at present, but should be mindful that if they wish to continue doing so, they will need to make a variation of requirements application when these changes take effect.
Should you have any questions about the above, please do not hesitate to contact one of the members of the Bird & Bird Financial Services team.
