The UK Government has published its response to the consultation on a regulatory gateway for authorised firms approving the financial promotions of unauthorised firms.
Let’s recall that, in July 2020, the Treasury launched a consultation on a Regulatory Framework for Approval of Financial Promotions.
Currently, section 21 of the Financial Services and Markets Act 2000 (FSMA) imposes a general restriction on the communication of financial promotions. Unauthorised persons may only communicate financial promotions if they are approved by an authorised firm (unless the promotion can otherwise be communicated pursuant to an applicable exemption in the Financial Promotion Order 2005).
The government is concerned that the current regime is not sufficient as there is no specific assessment authorised firms must undergo before they are able to approve financial promotions of unauthorised firms.
In response to these risks, the consultation proposed that FSMA should be amended so that authorised firms are no longer able to approve the financial promotions of unauthorised persons, unless the authorised firm had passed through a new regulatory ‘gateway’ operated by the Financial Conduct Authority (FCA).
The government identified two policy options in its consultation to deliver the proposed gateway:
- Option 1 – Restrict approval of the financial promotions of unauthorised firms through the imposition of requirements by the FCA. This would involve amending section 21(2)(b) of FSMA to remove the general ability to communicate financial promotions which have been approved by authorised firms. Section 21(2)(b) would be amended so that unauthorised persons were only able to communicate their own financial promotions if these had been approved by a firm which had obtained consent from the FCA to provide such approval.
A universal requirement (the Financial Promotion Requirement) would be imposed on all new and existing authorised persons prohibiting them from approving the financial promotions of unauthorised persons.3 An existing authorised person wishing to undertake approval of financial promotions would then need to apply to the FCA to have this requirement varied or cancelled. A firm applying for authorisation would be able to apply as part of its application for authorisation to have the requirement not to approve financial promotions varied or cancelled.
- Option 2 – Specify the approval of financial promotions communicated by unauthorised persons as a ‘regulated activity’ under FSMA. This would involve amending the Regulated Activities Order to make the approval of financial promotions of unauthorised persons a regulated activity, with firms requiring a Part 4A4 permission from the FCA before they could undertake the activity. Section 21(2)(b) would also have to be amended to provide that only financial promotions of unauthorised persons approved by a firm with the relevant Part 4A permission could be lawfully communicated.
A considerable majority of respondents supported the gateway. The main justification for supporting the gateway was that the requirements on approver firms are currently too low and more action is needed to encourage due diligence. A regulatory gateway which would lead to a specific assessment of firms’ suitability to approve financial promotions, and improved supervision was seen to achieve this.
Respondents that did not support the introduction of the proposed gateway had a variety of reasons for doing so. The main reasons included disorderly transition, additional administrative burden, and excessive reduction in number of approver firms leading to a disruption in the market.
There was a slight preference amongst respondents for option 1. Respondents were more likely to view option 1 as less onerous and more proportionate than option 2, as option 2 would more fundamentally alter the treatment of financial promotions within the regulatory framework. Respondents also raised other benefits of option 1, including that it provided a simpler process to follow, and would not make the approvals process excessively burdensome.
The government agrees with the majority view that a gateway should be introduced for the approval of financial promotions of unauthorised persons, and that this should be implemented through option 1. Under this gateway the ability of an authorised firm to assess a financial promotion will be specifically assessed against the FCA’s objectives.
The government considers this approach will achieve the desired objective of strengthening the FCA’s supervision of firms approving the promotions of unauthorised persons whilst maintaining the existing distinction between regulated activities and financial promotions as set out in FSMA.