UK: Review of Financial Services & Markets Act 2000

Last Updated: 7 January 2005

Since the Financial Services & Markets Act 2000 (‘‘FSMA’’) came into force on 1 December 2001 (the date known as N2) the Financial Services Authority (‘‘FSA’’) has continued its reform of the financial services industry through refinement of its regulatory approach and through revision and consolidation of its handbook. On 4 November 2003, the Treasury announced a review of FSMA after its first two years of operation.


The key elements of the review are:-

  • a review of the impact of FSMA on competition in financial services;
  • finding ways to reduce the cost of compliance by making its handbook more accessible and user-friendly;
  • changes to the boundary of regulation with particular regard to capital raisings and financial promotion;

It is expected that the review will take a year to complete.

This article will concentrate on the third element of the review with particular regard to the proposed changes to the Financial Promotion regime.


High Net Worth and Sophisticated investors – Articles 48 and 50 of Financial Services & Markets Act 2000 (Financial Promotion) Order 2001 (the ‘‘Order’’)

As part of the review, the Treasury published a consultation paper on the business angels exemptions. These exemptions have not been as widely used as had been hoped due to the problems of certification.

Currently, the high net worth exemption requires investors to obtain a certificate signed by their employer or accountant stating that they earn at least Ł100,000 or have net assets worth at least Ł250,000. The sophisticated investor exemption requires an authorised person to certify that the investor has sufficient knowledge to understand the risks associated with the proposed investment.

In practice, employers, accountants and authorised persons have been reluctant to issue certificates due to the fact that the subjective nature of the certification may expose certifiers to potential liability if someone is incorrectly certified. The Treasury is proposing that the current certificates are removed and are replaced by the concept of reasonable belief. The current proposals state that exemptions will be available if the person making the communication reasonably believes that the investor is a sophisticated investor or a high net worth individual.

The Treasury is considering three models of self-certification to replace or sit alongside the current exemptions. All three models would only apply to investments in unlisted equity.

The three models proposed are:

  1. to allow self-certification for high net worth individuals and continue the current certification process for sophisticated investors. Most investors fall into both categories but the test for high net worth individuals is based on objective criteria and therefore easier for self-certification; or
  2. to allow self-certification for high net worth individuals and self certification on the basis of an objective test for sophisticated investors; or
  3. to allow self-certification for both high net worth investors and sophisticated investors whilst keeping the current tests for each type of investor with an additional but less prescriptive test than the test in model 2 for sophisticated investors.

It is hoped that such proposals will boost fund raising of some smaller businesses. Responses to this consultation paper have been very supportive. For more information on these proposed changes please see the consultation paper on Proposed Changes to the Financial Promotions Order, published by the Treasury which can be assessed at .


The Treasury is considering narrowing the current exemption contained in Article 62 of the Order.

This first limb of the exemption covers communications made by or on behalf of a body corporate, partnership, individual or group of connected individuals which relate to an acquisition or disposal of 50% or more of the voting rights in the body corporate being sold. Both the buyer and seller must be a body corporate, partnership, individual or group of connected individuals. A group of connected individuals generally means the directors of the buyer or the seller or close relatives of such directors. However, even if the communication does not satisfy the above criteria, it may still benefit from this exemption if the object of the transaction may nevertheless reasonably be regarded as being the acquisition of day to day control of the affairs of the body corporate (referred to as the second limb).

The Treasury is concerned that this second limb of the exemption is too wide. It is concerned that ‘‘it may enable advice on specific investments arising out of a wide range of takeovers to be given to shareholders without the protections provided by FSMA regulation.’’

There is also a risk that the current wide exemption might undermine the effectiveness of the City Code on Takeovers and Mergers and affect confidence in the takeover process.

As a result, the Treasury is proposing narrowing this second limb of this exemption as follows:

  • It will only apply to parties for whom the object of the transaction may reasonably be regarded as being the acquisition or disposal of day to day control. It is hoped such amendment will stop advice to individual selling shareholders from being unregulated as their object in selling will not be to dispose of day to day control. The current exemption is wide enough to cover advice to individual selling shareholders.
  • A party to whom the revised exemption applies must be a ‘‘single person or a group of persons acting together for whom the object of the transaction may reasonably be regarded as acquiring or disposing of day to day control’’. A ‘‘group of persons acting together’’ is intended to catch a different category of persons to ‘‘a group of connected individuals’’ as used in the first limb of the current exemption.
  • This second limb exemption will only apply where the takeover is of a small company (possibly defined as a company beneficially owned by no more than fifty persons).

Whilst the Treasury is proposing to narrow the scope of the second limb, it is proposing to broaden slightly the scope of the first limb by adding the following categories of persons to the definition of group of connected individuals to whom the first limb applies:

(i) a nominee or personal representative; and

(ii) a body corporate owned only by persons who fall within the definition of ‘‘Group of Connected Individuals’’.


The Treasury is proposing to widen this exemption so that it includes communications made to or directed at such members and creditors. Currently the exemption does not cover communications that are addressed to persons generally (i.e directed at) and would not cover a promotion to shareholders contained on a company’s website. This is contrary to the recent changes to Company Law encouraging electronic communications to shareholders via websites.

This article focuses on the main changes to the financial promotion regime. For information on all of the proposals, please see Financial Services & Markets Act Two Year Review: Changes to Secondary Legislation consultation document accessible from the Treasury website at : .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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