FCA looks to shut stable door on financial promotions

In a year dominated by the implementation of the Consumer Duty, separate regulatory initiatives are being introduced with consumer protection in mind. From 6th November, firms can apply for a new permission to approve financial promotions for unauthorised persons, through the FCA’s new Gateway. The intent of the new permission requirement is to ensure that firms are approving promotions for investments in a way which demonstrates that they understand the specific product and risks of the promotions they approve. Reducing harm remains central, and the need to truly understand the products being promoted is key.

Financial promotions have been a consistent area of focus for the FCA in recent times. From the introduction of rules around high-risk investments last year to the inclusion of cryptoassets promotions within FCA’s ambit, measures have ensured increased monitoring and investigation of material by the financial promotions team at the regulator. The number of promotions that were amended or withdrawn was 8,582 in 2022, compared to just 573 for 2021. The latest requirements are another measure to combat consumer harm.

So what are the changes being introduced by the Gateway? Firms approving financial promotions for unauthorised persons will need to apply for a specific Part 4A permission from the FCA. The application window runs until 6 February 2024, and if a firm does not apply for the permission during that window, it must cease approving such promotions from 7 February 2024. Firms who make an application for the new permission during the window will be able to continue approving in-scope promotions until a decision has been made on their application.

There are certain exemptions from the requirement for authorised persons to seek the new permission. If the financial promotions are prepared by an unauthorised person that is part of the same corporate group as the authorised firm, this does not require permission. This is also true where the where an authorised firm creates its own promotions for communication by unauthorised persons. Finally, no permission is required for financial promotions prepared by Appointed Representatives, where the promotion relates to a regulated activity for which the authorised person (the Principal) has agreed to accept responsibility.

Crypto muddies the picture

Another important aspect intertwined with the Gateway is the introduction of cryptoassets into the financial promotions regime. Introduced in October 2023, the new rules set out the routes via which firms can communicate cryptoassets promotions to consumers. If the communications come from, or are approved by, an authorised firm, then they can be promoted. Otherwise, crypto firms must register with the FCA and comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘MLRs’), or their promotions must be exempted under the Financial Services and Markets Act 2000 (Financial Promotion) Order (‘FPO’).

The last avenue for communicating cryptoassets is particularly topical as the Treasury has released its consultation response on financial promotions exemptions for high net worth individuals and sophisticated investors. The proposals suggest a raising of the financial criteria bar for an individual looking to meet either status, however it remains to be seen whether the FCA will adopt the suggested criteria.

The introduction of cryptoassets into the regime will provide an interesting litmus test, both from the perspective of how the FCA will review applications from firms wishing to approve cryptoassets promotions, but also how firms will demonstrate that they have sufficient skills and expertise to approve such material.

What makes an FCA application successful?

On the subject of specific skills and expertise, the policy statement on the Gateway provided an insight into what the FCA expects from firms when making an application to get authorised for permission to approve financial promotions, or when they vary their permission to do so.

Firms are expected to, amongst other things, provide details on personnel, including the experience of the firm and individuals at the firm who will be responsible for providing approvals. They will also need to confirm which types of investments they will be approving promotions for, and provide details of their controls around the approvals process. This includes how they will ensure the authenticity and commercial viability of the propositions contained within promotions.

The last point in particular really places the onus on the firm to intrinsically understand a proposition, rather than rely purely on the information in the promotion. The FCA believe this level of oversight is crucial to reducing harm to consumers.

Reducing harm is at the heart of the regulator’s latest moves on financial promotions – there is genuine concern that poor compliance is leading to consumers being offered inappropriate products. Add in the complex and often volatile world of cryptoassets, with the reach of social media, and there is a clear consumer protection risk. Above all, firms must show that they understand the products they promote, or allow others to promote, and do not simply wave things through.