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New financial promotions regime on the stocks in UK

Chris Hamblin, Editor, London, 7 August 2020

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HM Treasury is proposing to open a 'regulatory gateway' through which authorised firms can approve the financial promotions of unauthorised firms.

At the moment, any authorised firm is able to approve any financial promotion of an unauthorised firm. There is no specific process through which the former must be gauged suitable and competent before it is allowed to approve the financial promotions of the latter.

With this in mind, the Treasury has published a consultative paper in which it proposes a more stringent regulatory regime to govern the approval of financial promotions. It has written: "The current requirement for an authorised firm to approve the financial promotion of an unauthorised firm may not operate as a strong enough safeguard to ensure such financial promotions are compliant with Financial Conduct Authority rules that they are fair, clear and not misleading."

The new regime is intended to stop firms authorised by the FCA from approving the unsuitable, misleading, unclear and unfair financial promotions of unauthorised firms. In official parlance, a "financial promotion" is a "communication" that contains an invitation or inducement to "engage in" a financial product or service. Such communications can take a wide variety of forms including printed advertisements, broadcasts, online advertisements or recommendations; marketing brochures; direct mail; or social media posts. Throughout the consultative document, HM Treasury often uses the phrase "communicating a promotion," without ever explaining exactly what this means.

HM Government believes that the UK's safeguards are not strong enough to ensure that financial promotions comply with the FCA's rules. It has come up with two policy options to, in its own phrase, "deliver the proposed gateway." Eventually, it wants to choose only one of the two.

Option 1

On one hand, the Government might restrict approval of the financial promotions of unauthorised firms through the imposition of rules by the FCA. This would involve a change to section 21(2)(b) Financial Services and Markets Act 2000 to remove "the general ability [of unauthorised firms] to communicate financial promotions" which authorised firms have approved.

If the Government were to go down this route, unauthorised persons/businesses would only be allowed to communicate their own financial promotions if these had been approved by firms which had obtained consent from the FCA to provide such approval. The FCA would be empowered to pass a rule to prevent all existing authorised firms from approving the financial promotions of unauthorised firms. Any authorised person that wanted to be allowed to approve financial promotions would then have to ask the FCA to lift this ban in its case.

Option 2

On the other hand, the Government might specify the approval of financial promotions communicated by unauthorised persons as a ‘regulated activity’ under the FSMA. This would involve amending the Regulated Activities Order to make the approval of financial promotions of unauthorised persons a regulated activity, with firms requiring a Part 4A1 permission from the FCA before they could do it. Parliament would also have to change section 21(2)(b) to state that, in the Treasury's words, "only financial promotions of unauthorised persons approved by a firm with the relevant Part 4A permission could be lawfully communicated."

HM Treasury's consultative document asks the following questions.

  • Do you agree that a gateway should be established enabling the FCA to assess the suitability of a firm before it is permitted to approve the financial promotions of unauthorised persons?
  • What are the risks and benefits of each of the two policy options put forward? Would there be any unintended consequences resulting from implementation?
  • If the government was to proceed with one of the two policy options, which would be your preference and why?

The canvassing exercise will start on 20 July. Comments must be in by 25 October.

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