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The U.K. is assessing its financial promotion framework, and changes are being made or proposed to amend the laws and rules. Financial promotions are defined as “invitations or inducements to engage in investment activity” and cover a broad range of marketing communications relating to financial products. Such communications may, on the whole, only be made in the U.K. by regulated financial institutions. The rules are particularly relevant for retail investors since most wholesale activity is exempted.
Various issues with the rules have been noted recently, with reforms proposed by the Gloster Report or otherwise introduced by the U.K. Financial Conduct Authority (“FCA”), related to the fall-out from the London Capital & Finance Plc (“LC&F”) scandal. At the same time, the risk of retail investment in crypto-assets and an increase in scams and financial fraud, particularly through the pandemic, have resulted in policy intervention. This client note sets out the changes, some of which will be made through legislation, and others in changes to the FCA’s rules. Many of the changes would be a welcome enhancement to the U.K. financial promotions regime, and may reduce potential harm to retail investors.
The Financial Services and Markets Act 2000 (“FSMA”) sets out a prohibition on communicating an “invitation or inducement to engage in investment activity” either in the U.K. or in a way that could have an effect in the U.K. (the “Financial Promotion Restriction”). Firms authorised in the U.K. are exempt from the Financial Promotion Restriction; however, they must still comply with the rules governing financial promotions when making any promotion or when approving a financial promotion of an unauthorised firm. All financial promotions must be fair, clear and not misleading. A wide range of communications are covered—including advertising, broadcasts, emails, websites, Facebook, tweets—and the rules apply regardless of whether the communication is made to one person or many people. Certain communications do not constitute a financial promotion because, for example, the communication does not relate to an “investment activity” or is not an inducement or invitation. In addition, there are various exemptions.
Exemptions from the Financial Promotion Restriction are set out in the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005 (the “FPO”). Exempt communications are not subject to the requirement that they be made by a regulated financial institution, and the FCA’s rules on financial promotions are inapplicable to exempt communications. These exemptions include certain financial promotions to self-certified sophisticated investors and to certified high net worth individuals.
HM Treasury is consulting on proposed changes to the financial promotion exemptions for high net worth individuals and sophisticated investors. The main aim of the proposals is to mitigate instances of misuse of certain exemptions by some firms who have marketed inappropriate products to retail customers. LC&F was one such firm, which encouraged retail bondholders to confirm they fell within sophisticated or high net worth investor categories without considering whether they in fact met the appropriate criteria. The Treasury Select Committee’s report on the failure of LC&F recommended that various financial promotion exemptions, including those for high net worth and sophisticated investors, be re-thought to ensure more effective consumer protection.
The main proposals or open items in the consultation include:
HM Treasury proposes removing criterion 2. above because it does not consider it to be an indicator of investor sophistication. The availability of online investing makes it is a lot easier today for individuals to invest in unlisted companies than it was when first introduced in 2005. In addition, it is proposed that the threshold (in condition 4.) of £1 million should be increased to reflect inflation.
High-risk investments are those to which marketing restrictions apply. These include Non-Readily Realisable Securities (“NRRS”), peer to peer (“P2P”) (loan) agreements, Non-Mainstream Pooled Investments (“NMPI”) and speculative illiquid securities (“SIS”). Since January 2020, the marketing of SIS to retail investors has been banned (by the FCA), first under a temporary product intervention measure, then made permanent from 1 January 2021. The measure prohibits the mass-marketing of non-transferable bonds (sometimes referred to as “mini-bonds”) and preference shares to retail investors, subject to certain exemptions, and requires improved disclosure to be made to high net worth and sophisticated investors.
The FCA is proposing to organize its rules for marketing securities into three different categories:
The FCA is also proposing to amend the financial promotion rules for Restricted Mass Market Investments and Non-Mass Market Investments. It is proposed that firms would have three months from publication of the final rules to comply with the new rules. The proposed changes include:
HM Treasury recently confirmed a tightening of the rules for financial promotions of certain unregulated crypto-assets. These crypto-assets, called “qualifying crypto-assets,” will be brought within scope of the U.K.’s financial promotion rules by bringing them within the scope of the FPO as controlled investments. This will not change the FCA’s current guidance on where certain crypto-assets are within the financial regulatory perimeter and for which authorisation would be required. HM Treasury is only concerned with the promotion of unregulated crypto-assets.
Qualifying crypto-assets are defined as being fungible (i.e. freely replaceable by another of a similar nature or kind) and transferable (which excludes crypto-assets in closed systems). E-money and central bank digital currencies will be excluded from the definition. In a change from the original proposal, the government has decided to remove the reference to distributed ledger technology from the definition of a qualifying crypto-asset. This is to future-proof the definition for technological innovation.
HM Treasury does not intend to add any controlled activities to the FPO based on its view that the current list of controlled activities reflect the activities that crypto-asset businesses conduct in the U.K. However, not all the controlled activities are relevant to qualifying crypto-assets and the FPO will be amended to apply the financial promotion restriction to the following controlled activities undertaken in relation to qualifying crypto-assets:
HM Treasury has indicated the types of exemptions that would apply to qualifying crypto-assets. The exemptions in Part IV of the FPO, which include exemptions for promotions made to investment professionals, journalists and overseas recipients, apply to all controlled activities and will apply to all qualifying crypto-assets. The exemptions in Part V, which only apply to relevant insurance activity, would not apply to qualifying crypto-assets. Only some of the Part VI exemptions, which include promotions to self-certified sophisticated investors, high net worth companies, governments and central banks, would apply to qualifying crypto-assets. HM Treasury states that the Part VI exemptions for high net worth individuals and self-certified sophisticated investors would not apply to qualifying crypto-assets because the exemptions only apply to the specified investments listed in the FPO.
A proposed additional exemption for a vendor stating that it is willing to accept or offer qualifying crypto-assets in exchange for goods and services is being dropped. HM Treasury has opted not to add any such exemption because such a statement would not constitute an inducement to enter into an investment activity and would therefore not fall within the scope of the FPO.
The FCA is proposing to apply to qualifying crypto-assets the same rules proposed for other high risk investments classed as Restricted Mass Market Investments. This is a more lenient approach than that taken in other jurisdictions, such as Singapore. The FCA proposes that the new rules would apply from the date qualifying crypto-assets are brought within the financial promotion regime. The FCA intends to publish its final rules in summer 2022. Following feedback, HM Treasury has decided to implement a six-month transitional period from the finalization of the legislative measure and the publication of the FCA’s final rules.
The U.K. financial promotion rules provide that a person may not communicate a financial promotion—an invitation or inducement to engage in an investment activity—unless the communication is exempt, the firm is authorised to carry on a regulated activity or the communication is approved by an authorised firm. Only financial promotions that are not “real-time” (e.g. spoken on calls, personal meetings or online chat services) may be approved by an authorised person, and any approval must comply with the FCA’s financial promotion rules.
HM Treasury has confirmed that it will be implementing the regulatory gateway for the approval of financial promotions of unauthorised firms. This will mean that authorised firms will generally be banned from approving financial promotions of unregulated firms and will need to apply to have the prohibition removed in whole or part before they are able to approve financial promotions of unauthorised firms. The change will be made through legislation amending the FSMA. There will be exemptions: first, for authorised firms approving financial promotions of unregulated firms within their group; and secondly, for principals approving financial promotions for their appointed representatives for regulated activities, for which the principal has agreed to accept responsibility.
The FCA is proposing to amend its rules on the approval of financial promotions of unauthorised firms by authorised firms, including, among other things, to:
Firms would be required to keep records of how they meet the requirement for each approved financial promotion. The FCA is considering how these changes may be linked into the Senior Managers and Certification Regime, but has not yet made any proposals in that regard.
The FCA is also considering stronger rules for ensuring financial promotions remain compliant, including requiring firms to take reasonable steps to monitor the continuing compliance of approved promotions and requiring firms to collect, every three months, attestations of “no material change” from clients with approved promotions. These proposed obligations will be fairly onerous for firms, although will benefit retail investors.
The FCA is proposing to allow firms three months from the publication of the final rules to comply.
 Exemptions from the restrictions on financial promotion include communications directed only at investment professionals (generally, authorised firms, firms carrying out activities that would require authorisation but for which there is an exemption and governments) and large corporates (Article 19 and 49, the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005). Limited exemptions are available for communications directed at individuals, such as the exemption for communications directed at high net worth individuals (article 48) and sophisticated investors (articles 50 and 50A).
 Report of the Independent Investigation into the Financial Conduct Authority’s Regulation of London Capital & Finance plc, The Rt. Hon. Dame Elizabeth Gloster DBE, 23 November 2020.
 Section 21, FSMA.
 S.I. 2005/1529.
 Section 50 and 50A, FPO, respectively.
 Section 48, FPO.
 Financial promotion exemptions for high net worth individuals and sophisticated investors: a consultation, December 2021. The consultation closes on 9 March 2022.
 For details of the FCA’s ban, see our blog, “UK Conduct Regulator Makes Permanent Ban on Marketing Speculative Illiquid Securities to Retail Investors“, 10 December 2020.
 Note that following the judgment in Donegan & Ors, R (On the Application Of) v Financial Services Compensation Scheme Ltd  EWHC 760 (Admin), the “non-transferable bond” product may be a null set, since in that case the non-transfer clauses in the bonds under scrutiny were held to be unfair and unenforceable against consumers under the Consumer Rights Act 2015. Following the failure of LC&F, HM Treasury has consulted on making the issuance of non-transferable debt securities (“NTDS”) a regulated activity and/or extending the scope of the Prospectus Regulation to cover NTDS, so that issuers wanting to offer NTDS to the public in the U.K. would have to publish an FCA-approved prospectus. Further detail on the consultation is available in our blog, HM Treasury Launches Consultation on Regulation of Non-Transferable Debt Securities, 19 April 2021.
 Strengthening our financial promotion rules for high risk investments, including cryptoassets, CP22/2, 19 January 2022. Responses to the FCA’s consultation may be submitted until 23 March 2022.
 The FCA is proposing: “Don’t invest unless you’re prepared to lose all your money invested. This is a high risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2 min to learn more”.
 Cryptoasset promotions: Consultation response, 18 January 2022, HM Treasury.
 Guidance on Cryptoassets: Feedback and Final Guidance to CP 19/3, Policy Statement (PS19/22), July 2019, FCA
 Guidelines on Provision of Digital Payment Token Services to the Public, PS-G02, Monetary Authority of Singapore, 17 January 2022.
 Regulatory Framework for Approval of Financial Promotions: Consultation Response, HM Treasury, 22 June 2021.
 CP22/2: Strengthening our financial promotion rules for high risk investments, including cryptoassets. FCA, January 2022.