Financial promotions on course for further scrutiny under new FCA rules

Last week (6 December 2022), FCA published a new consultation (CP27/22) on proposals to introduce more stringent rules for firms wanting to approve financial promotions for unauthorised firms. In this article, we look at what FCA are proposing, why and what firms should be doing in response.

Background

This latest consultation builds on a flurry of work in this area by both FCA and the Treasury. In July 2020, the Treasury launched a consultation on a Regulatory Framework for Approval of Financial Promotions and FCA have been notably more assertive recently in their supervisory action in relation to financial promotions. For instance, they required the removal or amending of over 5,000 financial promotions from authorised firms between January and October this year, compared to 564 in 2021.

The consultation also follows the FCA’s recent work on strengthening rules around advertising for high-risk investments (PS22/10). The first phase of those new rules applied from 1st December and concerned risk warnings. The second phase of rules enter into force from 1 February 2023 and aim to strengthen the role of a S21 approver, including by introducing an explicit requirement that s21 approvers:

• take reasonable steps to monitor the continuing compliance of an approved promotion for as long as it is communicated

• do not approve promotions unless they have appropriate competence and expertise in the product or service to which the promotion relates

FCA reiterate in the latest consultation that they have seen too many poor quality, non‑compliant promotions being approved and then communicated by unauthorised firms to retail consumers, often resulting in harm due to consumers. The new proposals aim to tackle this by ensuring firms have the appropriate expertise and are held accountable for the promotions they sign off.

However, we expect a relatively small number of firms to be directly impacted by the new proposals. This is because approving financial promotions as a service is less common following FCA’s action in this area, and there are exemptions from the requirement to seek the relevant permission which appear to cover common examples of financial promotion approval activity (such as Principal firms approving AR promotions). That is not, however, to say the proposals can be ignored. Firms who do not approve financial promotions for unauthorised firms, or who believe their approving activity is exempt, should validate this assessment and ensure they are complying with existing rules and guidance. This is especially important given FCA’s warning of further reviews and monitoring in this area…

What are FCA proposing?

New regulatory gateway for s21 approvers

Currently, UK law (Section 21 of Financial Services and Markets Act 2000 (FSMA), as amended) sets out ‘the financial promotion restriction’ which prohibits a person from communicating a financial promotion unless that person is an authorised firm, or the content of the promotion is approved by an authorised firm. Firms that approve financial promotions in this way are commonly referred to as “S21 approvers”.

The FCA’s new consultation paper builds on proposed legislative changes introduced under the Financial Services and Markets Bill (the FS Bill), which includes provisions to amend FSMA to create the regulatory gateway for s21 approvers. Specifically, section 21 of FSMA will be amended by the insertion of a requirement that financial promotions may only be approved for communication by an authorised firm if that authorised firm has the relevant FCA permission, or it falls within an exemption to this requirement.

The proposed FSMA amendments will impose a new ‘Financial Promotion Requirement’ (FPR) on all existing and newly authorised firms, restricting them from approving financial promotions. An authorised firm who wants to approve financial promotions for unauthorised firms will therefore need to apply to the new s21 gateway for permission to do so. 

The application for permission to approve financial promotions will be submitted in the usual way via Connect as a Variation of Permission (VOP). FCA are consulting separately on the cost of the application but it is currently proposed that it will cost a flat fee of £5,000. The proposals include transitional provisions for firms who apply within the application period (to be determined) to enable them to continue approving financial promotions in the time between submitting the application and it being determined by FCA.

Notification and reporting requirements

Under the new proposals, FCA are also looking to introduce new reporting requirements for firms with permission to approve financial promotions. Firms will need to submit a notification to FCA for every financial promotion they approve. Interestingly, what the FCA means by a financial promotion appears to differ for reporting purposes from the glossary definition. FCA will consider ‘1 approved financial promotion’ to be one set of promotional content for a campaign for a particular product. For example, it would not consider a webpage, email and banner for the same product to each be distinct financial promotions for reporting purposes. FCA propose to add guidance to the Handbook on this.

FCA are proposing to require a s21 approver to notify them within 7 days of approving, withdrawing approval, or amending approval of a promotion. The proposals also include a requirement for firms to complete a bi-annual report on other elements of their approval activity.

What firms are in scope?

It is proposed that authorised firms approving financial promotions for the following purposes only would be exempt from the need to apply to the gateway:

• approving their own financial promotions for onward communication by an unauthorised firm, such as where a firm uses introducers

• approving financial promotions for an unauthorised business in their corporate group (e.g. for overseas parents or unauthorised affiliated entities)

• approving financial promotions for their ARs, where the promotion relates to a regulated activity for which the principal has the relevant permissions and has agreed to accept responsibility

In any case, firms who meet the conditions of an exemption(s) must still ensure they are aware of their role and responsibilities as a s21 approver under the relevant financial promotion rules (eg COBS 4). See here for more information: Approving financial promotions | FCA

FCA warn that they will keep this under review and will assess whether firms are seeking to inappropriately exploit the exemptions to avoid applying to the s21 gateway.

Timeframe

The consultation was published on 6 December 2022 and is open until 7 February 2023. However, the FS Bill is still in the process of being considered by Parliament and has not received Royal Assent so the proposals consulted on remain subject to the completion of that process.

How can ComplyCraft help?

If you are unsure on how the proposals might impact your firm, please do get in touch. ComplyCraft can also:

·        Review your activities and confirm or challenge your impact assessment

·        Review the applicability of any exemptions

·        Assess the firm’s financial promotion approval processes against relevant rules and guidance

·        Where it has been identified that the firm will need the new permission, assist with the application to the FCA