On 12th September 2023, the Financial Conduct Authority (FCA) published its policy statement containing its ‘near final’ rules on Introducing a gateway for firms who approve financial promotions (PS23/13). The policy statement, which follows on from the FCA’s consultation on the gateway running from December 2022 – February 2023, sets up the new regime for firms approving financial promotions for unauthorised persons.
The changes are part of recent legislation outlined by HM Treasury in the Financial Services and Markets Act 2023 (“the Act”), including changes to the financial promotions prohibition set out in section 21 of the Financial Services and Markets Act 2000 (FSMA). The motivation for creating the gateway is that the FCA has historically “seen too many non-compliant promotions being approved and then communicated by unauthorised persons to consumers.” In the regulator’s view, this poses a risk of harming consumers where they rely on information in financial promotions and those promotions are non-compliant, or the underlying product is inappropriate for the consumer (for example, due to high levels of risk or complexity). Acting to avoid foreseeable harm for retail consumers is also a key element of the Consumer Duty, which came into force from end July 2023.
What is a financial promotion?
A financial promotion, as defined in the FCA Handbook, is “an invitation or inducement to engage in investment activity” that is “communicated in the course of business”. Section 21 of FSMA (‘Restriction on financial promotion’) sets out that a person cannot communicate a financial promotion unless:
- They are an authorised person; or
- The content of the communication has been approved for the purposes of section 21 by an authorised person.
Due to the risk of consumer harm, the restrictions on approving and communicating financial promotions are being heightened.
What is changing?
Prior to the new regime, any authorised person could approve financial promotions to be communicated by an unauthorised person (i.e. act as “S21 approver”). Under the new gateway regime a ‘Financial Promotion Requirement’ (FPR) is being applied to all authorised firms, restricting them from granting s21 approval. Firms will only be able to grant s21 approvals – i.e. approve financial promotions to be communicated by unauthorised persons – by applying to the FCA to vary their permissions to receive the new approver permission.
The changes impact all authorised firms who wish to approve financial promotions for unauthorised persons, however legislation sets out exemptions to the new rules which mean that authorised persons do not need permission from the FCA to approve:
- Financial promotions of their appointed representatives (ARs), where the promotions relate to regulated activity for which the principal authorised firm has accepted responsibility;
- An authorised firm’s own financial promotions, for communication by unauthorised persons; or
- Promotions prepared by unauthorised persons within the same corporate group as the authorised person.
Application and ongoing requirements
As part of their applications, firms will need to indicate the types of products for which they are seeking to approve financial promotions. Firms will also need to demonstrate that they meet the regulator’s criteria for being able to manage s21 approvals. For example, that they have adequate systems and controls in place to ensure the promotions they approve are compliant, that they have sufficient resources to handle the anticipated volume of approvals, and that they have processes in place to record-keep and withdraw approvals where appropriate.
The FCA has published a webpage with information for firms on how to apply for the s21 approver permission.
Ongoing reporting requirements will be placed on firms who gain permission to be s21 approvers, via both ad hoc notifications and periodic reporting. This includes notifying the FCA within 7 days when the firm approves a promotion for a product subject to marketing restrictions (for example, non-mass market investments like mini-bonds), and notifying where a firm has withdrawn approval or approved amendments to a previously approved promotion.
Timeline
The application period runs from 6th November 2023 until 6th February 2024 (inclusive). Firms who apply during this period will be able to continue to grant s21 approvals during the application period and until their application has been determined by the FCA (the ‘transitional period’).
If a firm’s application is rejected or their approval excludes promotions for certain product types, then approval activity for the relevant product types must cease. However, those firms will still need to meet the existing requirement for ongoing monitoring of the compliance of promotions they have already approved.
ShareIn welcomes the new gateway regime as part of the FCA raising the bar for consumer protection and as part of the regulator’s wider work related to mitigating potential harms in the industry from high-risk investments.