Background to the new Financial Promotion Gateway requirements
In July 2020, HM Treasury (HMT) consulted on a revised regulatory framework for financial promotions including a proposal to change the general restriction in section 21 of the Financial Services and Markets Act 2000 (FSMA) on the communication of financial promotions. A review of the approval of financial promotions was taken as the FCA had identified a number of cases of non-compliant promotions being approved and then communicated by unauthorised firms resulting in a failure to comply with the financial promotions requirements..
Under section 21 of FSMA, a person cannot communicate a financial promotion unless that person is, or the content of the promotion is approved by, a firm which is authorised to carry on a regulated financial services activity.
In June 2021, HMT set out its consultation response concluding 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 financial promotion gateway to be operated by the FCA as set out in the new Financial Services and Markets Act 2023 (the Act).
The financial promotion gateway is relevant to all firms, but will have a significant impact on firms who have introducer networks particularly in the retail investments space.
In its consultation response, HMT concluded that the financial promotions gateway would lead to several improvements including the following:
- More effective prevention and intervention: The FCA will be able to assess firms’ suitability and competence before they are able to approve financial promotions of unauthorised persons. This will allow the FCA to prevent unsuitable firms from approving financial promotions.
- Ensuring approver firms have relevant expertise: Consent could be linked to products or services within the firm’s area of expertise meaning that only firms with the relevant expertise are able to approve the promotion of a particular product.
- More effective FCA oversight and supervision: The FCA will have better oversight of which firms are carrying on approval activity, meaning it can take a more proactive supervisory approach, for example targeting its supervision where the risks are highest.
- Improved due diligence: More effective oversight and supervision should, in practice, mean that authorised approvers conduct more in-depth due diligence to ensure that the substance and presentation of a promotion meets regulatory standards, before providing approval.
The proposal has been integrated into legislation by way of amendments to FSMA which are contained in the Act. For further information on the Act see this Engage article.
FCA consultation in relation to the financial promotion regulatory gateway
In FCA consultation paper ‘Introducing a gateway for firms who approve financial promotions’ (CP22/27) published in December 2022, the FCA consulted on the detailed requirements of the financial promotion regulatory gateway. The section 21 FSMA amendments to reflect the gateway will impose the new ‘Financial Promotion Requirement’ (FPR) on all existing and newly authorised firms, restricting them from approving financial promotions unless they have obtained permission from the FCA to do so. Firms will be able to apply to approve all types of financial promotion or only those promotions for certain types of products but they will have to demonstrate to the FCA that they have the necessary competence and expertise to do so. The FCA states in CP22/27 that it is unlikely that many firms will have the competence and expertise to obtain permission to approve all types of financial promotions.
Key points in CP22/27 include:
- the basis for granting or refusal of applications;
- a bi-annual reporting requirement for firms that are given permission to approve financial promotions;
- a notification requirement on firms that are granted permission to approve financial promotions to submit to the FCA a notification including defined characteristics (for example the product name/type/date of approval and medium of communication) for every financial promotion that is approved, where that approval is withdrawn or where amendments to a financial promotion have been approved. If the notification requirements make it into the final rules, this will require firms to put in place additional internal processes to ensure compliance, and to ensure that their arrangements with these third parties contain adequate restrictions which could prove to be burdensome.
- the compulsory jurisdiction of the Financial Ombudsman Service will not be extended to provide a general right to complain to it about the approval of financial promotions;
- the approval of a financial promotion is not a regulated activity and as a result, no Financial Services Compensation Scheme (FSCS) cover is available for claims based on a complaint regarding the approval of a financial promotion; and
- authorised firms will need to consider their responsibilities under the Consumer Duty when approving promotions for unauthorised firms including the consumer understanding outcome.
FCA CP22/27 closed for comments on 7 February 2023.
The Financial Promotions Gateway application process
The application process
When the gateway takes effect, firms with an existing Part 4A permission (existing authorised firms) should apply to the FCA for permission to approve financial promotions as per the usual process by submitting a Variation of Permission (VOP) application through Connect. The length of the application period will be determined by secondary legislation produced by HMT which is yet to be made. The FCA will assess the firm and determine whether to grant permission. The FCA may refuse to grant permission at the gateway if it appears to the FCA that it is desirable to do so in order to advance one or more of its operational objectives, for example to secure an appropriate degree of protection for consumers.
The Act also grants the FCA a power to amend the terms of, or to cancel, a firm’s permission to approve financial promotions. The power could be exercised (i) where it appears that a firm has failed to engage in any approval activity over a 12 month period or (ii) where this was otherwise desirable to advance one or more of its operational objectives. The FCA is required to consult with the PRA before acting at the gateway in relation to firms or applicants for authorisation which are, or will be, PRA-authorised or which are members of groups which include PRA-authorised firms.
In recognition that the imposition of the FPR represents a significant change for existing authorised firms approving financial promotions for unauthorised firms, HMT’s consultation response set out plans for a transition period on introduction of the section 21 gateway. Firms that apply at the gateway within the application period will be allowed to continue approving promotions for unauthorised firms while their application for permission to approve is being determined (during the transition period). If their application is successful, they will see no interruption to their ability to approve financial promotions. If their application is unsuccessful with regards to a particular product type for which they have applied for permission to approve promotions, the firm will need to cease s21 approval activity immediately in relation to that product type once their application has been determined.
During the transitional period, the FCA will assess applications received and the period will end on a case-by-case basis as each application has been determined. The FCA will have up to 12 months to determine applications for permission to approve financial promotions.
All other existing authorised firms that do not apply to the gateway within the initial application period will have the FPR imposed on them by legislation at the end of the application period and will no longer be able to approve financial promotions for unauthorised firms from that date (other than within an exemption).
Exemptions from the financial promotions gateway
HMT indicated in its consultation response that authorised firms only approving financial promotions for the following purposes would be exempt from the need to apply to the gateway:
- approving their own financial promotions for onward communication by an unauthorised firm;
- approving financial promotions for an unauthorised business in their corporate group;
- approving financial promotions for their appointed representatives (ARs), where the promotion relates to a regulated activity for which the principal has the relevant permissions and has agreed to accept responsibility.
Any exemptions will be made through secondary legislation. The FPR will not apply to the giving of approval falling within the scope of an exemption. However, persons approving in these circumstances must still ensure they are aware of their role and responsibilities as a s21 approver under the relevant financial promotion rules (COBS 4). This includes ensuring that the financial promotion is fair, clear and not misleading and complies with marketing restrictions as required.
Financial Promotions Gateway and PS22/10 FCA Policy Statement
As set out above, the new proposals for the financial promotion gateway require firms to consider the updated guidance for financial promotions which came into effect on 1 February 2023. FCA Policy Statement 22/10 (PS22/10) strengthens the financial promotion rules for high-risk investments (HRIs) and those approving financial promotions. These include the following requirements:
- A firm issuing a promotion will be permitted to replace the FCA’s standard requirements with text that refers to the authorised firm’s Firm Reference Number in this format ‘Approver FRN xxxxx’. This text must be clickable and must open a page where the firm’s full name, and the date of the approval, must be displayed.
- Firms should self-assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a relevant financial promotion (as further detailed above).
- Approvers should take reasonable steps to monitor the continuing compliance of approved promotions.
- Approver firms are required to obtain attestations of ‘no material change’ from clients with approved promotions every 3 months for the lifetime of the approved promotion.
- Ongoing appropriateness assessments to ensure these remain compliant throughout the lifetime of a promotion.
The Financial Services Register
The Financial Services Register is a public record of (amongst other things) firms that are, or have been, regulated by the FCA and individuals that have been approved. The Register includes information on requirements placed on firms and the FCA plans to make information about firms’ permission to approve financial promotions publicly available on the Register.
The FCA CP22/27 closed on 7 February 2023. The FCA intends to publish the Policy Statement and final rules in the first half of 2023. Now that the Financial Services and Markets Act 2023 granting powers in relation to the new regulatory gateway has been enacted, this should mean that the policy statement on this matter is imminent.
FCA CP22/27 closed on 7 February 2023. Now that the Act granting powers to the FCA in relation to the new regulatory gateway has been enacted, we understand that the FCA intends to publish the Policy Statement and final rules shortly. The final rules will confirm when the application process for the new gateway opens. We will continue to monitor for key developments in relation to this important development. If you have any questions on it or would like to discuss please get in touch with your usual Hogan Lovells financial services regulatory contacts or Michael Thomas and Anahita Patwardhan.
Authored by Anahita Patwardhan and Melanie Johnson.