HMT consults on approving financial promotions of unauthorised firms

Overview

On 20 July 2020, HM Treasury published proposed reforms to the regulatory framework for the approval of financial promotions by unauthorised firms under FSMA 2000.

The consultation period ends on 25 October 2020.

HMT's proposals would introduce a gateway though which authorised firms that want to be able to approve the financial promotion of an unauthorised person would have to pass.

The consultation puts forward two options for establishing this gateway:

• restricting approval of such financial promotions through the imposition of requirements by the FCA; or
• specifying the approval of such financial promotions as a 'regulated activity' under FSMA.

Background

Under the UK's financial promotion regime (set out in s.21 of FSMA), communication of financial promotions is subject to two key regulatory safeguards

• a person can only communicate a financial promotion if that person is, or the content of the promotion is approved by, an authorised firm; and
• the FCA has binding rules with which authorised firms must comply when communicating or approving a financial promotion.

Which means that, at the moment, any authorised firm can approve an unauthorised person's financial promotion without having to pass any specific test of suitability or competence before it does so.

Recently, and despite the two Dear CEO letters, which it sent out in January and April 2019 to flag its concerns, the FCA has identified a number of cases where authorised firms have either

• failed to undertake adequate due diligence to ensure that the approved promotion meets FCA requirements; or
• approved financial promotions which relate to products beyond their sphere of expertise and which, as a result, fail to comply with FCA rules.

What's being proposed?

HMT's plan would be to amend FSMA to remove the general ability of authorised firms to approve financial promotions of unauthorised persons.

Under this plan:

• firms which want to approve financial promotions for an unauthorised person or firm will first have to obtain the FCA's consent; and
• unauthorised persons or firms could only communicate a financial promotion if this has been approved by a firm which has obtained consent from the FCA to provide approval.

This allows the FCA to operate a specific 'gateway' that firms must pass through before being able to approve the financial promotions of unauthorised persons.

(Note, though, that the new gateway would not apply to a firm approving the financial promotions of an unauthorised person within the same group or to the approval of an authorised firm's own promotion which is to be communicated by an unauthorised persons.)

HMT's consultation paper identifies two policy options for delivering this proposed gateway - both would mean making amendments to section 21 and other sections of FSMA.

• Option 1 - Restricting 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 so that unauthorised persons could only communicate their own financial promotions if these had been approved by a firm which had FCA consent to provide approval.

  Existing authorised firms would be prevented by a new FCA requirement from being able to approve the financial promotions of unauthorised persons unless they had applied to the FCA to have the requirement varied or cancelled.

  A firm which applied for a new permission to carry on a regulated activity could request that its permission included consent to approve the financial promotions of unauthorised firms.

• Option 2 - Specifying the approval of financial promotions communicated by unauthorised persons as a 'regulated activity' under FSMA:

  This would involve amending the Regulated Activities Order made under FSMA to make the approval of financial promotions of unauthorised persons a regulated activity.

  Firms would then need a Part 4A permission from the FCA before they could undertake this activity.

  Section 21(2)(b) of FSMA 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.