UK: FCA Consults On Gateway For Firms Approving Financial Promotions For Unauthorised Persons

The FCA has set out its plans to operate a new gateway for the approval of financial promotions (CP22/27).

Who could be affected?

Firms which approve financial promotions for unauthorised firms should review and consider these proposals carefully.

Unauthorised firms which currently rely on authorised firms to approve their financial promotions should also consider how they may be affected. Authorised firms they currently rely on may not apply for gateway permission to approve financial promotions or may be refused permission by the FCA. These firms will need to consider whether they can continue to communicate financial promotions using exemptions in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).

One important exemption proposed by the FCA is that the gateway would not apply to firms approving the financial promotions of an unauthorised person within the same group.

Responses to the consultation are requested by 7 February 2023.

What is the gateway?

Following an HM Treasury (HMT) consultation on the regulatory framework for approval of financial promotions in July 2020, HMT proposed that authorised firms (Approver Firms) should only be able to approve the financial promotions of unauthorised firms, if they have passed through a new regulatory 'gateway' operated by the FCA. The Financial Services and Markets Bill, introduced in Parliament on 20 July 2022, includes provisions to amend the Financial Services and Markets Act 2000 (FSMA) to implement this change: authorised firms will need to apply to the FCA for permission under new section 55NA FSMA to approve financial promotions of unauthorised businesses.

What will be the FCA's role within the gateway?

The FCA will operate the gateway. The prohibition on firms' approval of financial promotions of unauthorised firms will operate by default and will be referred to as the Financial Promotion Requirement (FPR). Firms wishing to approve such financial promotions will therefore need to apply to the FCA for permission to have the FPR varied or cancelled. This permission is separate from any Part 4A permission to carry on regulated activities.

How will the FCA operate the gateway?

CP22/27 describes the FCA's proposed approach to assessing applications, when it might recommend the refusal of an application, a timeline for the application process and transition period, and updated non-handbook guidance on approving financial promotions.

Ongoing notification and reporting requirements also expected to apply to Approver Firms are as follows:

• Approver Firms must submit a notification to the FCA upon an approval or amendment of a financial promotion, or withdrawal of an approval of a financial promotion, within 7 days. The fields within the notification include the reason for amendment/withdrawal and the FCA hopes that these entries will allow the notification to be ranked in terms of risk posed to consumers which will help with allocation of supervisory resources.
• Firms will need to report to the FCA bi-annually on various metrics relating to the financial promotions approved in the preceding reporting period.

Scope

• In-scope: The proposals will affect authorised firms which approve, or intend to approve, financial promotions for unauthorised firms. The FCA's proposals are only applicable to authorised firms, but unauthorised firms should consider how they may be affected. For example, Approver Firms may scrutinise financial promotions more carefully in future and may expect to charge more for doing so. Unauthorised firms should also consider how they will promote in future if their existing 'approvers' do not receive permission from the FCA or if they decide not to apply for permission (e.g. a replacement approver must be found or they would need to rely on FPO exemptions).
• Exemptions for appointed representatives, intra group approvals etc: The government stated in its original consultation that it does not intend the new gateway to apply to firms approving the financial promotions of an unauthorised person within the same group, or to the approval of authorised firms' own promotions for communication by unauthorised persons. Following feedback from the consultation, the government also proposed to exempt from the gateway principals approving financial promotions for their appointed representatives in relation to regulated activities for which the principal has agreed to accept responsibility.

Transition period

HMT's response to its July 2020 consultation sets out plans for a transition period on introduction of the s.21 gateway. This transition period would enable firms that make an application during a specified initial period to continue approving promotions for unauthorised firms while their application for permission to approve is being determined. If their application is successful, there should be no interruption to their ability to approve financial promotions. If their application is unsuccessful with regards to a particular product type, the firm will need to cease s.21 approval activity immediately in relation to that product type.

Redress

• The Financial Ombudsman Service (FOS): There is no general right to complain to the FOS about the approval of financial promotions and the FCA does not currently believe it would be helpful to extend the compulsory jurisdiction of the FOS to allow such complaints. In the FCA's view, even if a financial promotion did not meet the FCA's requirements, it would not automatically follow that the Approver Firm was responsible for losses suffered by a complainant. It considers that giving access to the FOS in these cases could raise unrealistic expectations as to the redress that might be available from the approver.
• The Financial Services Compensation Scheme (FSCS): As the approval of a financial promotion is not regulated activity, there is no FSCS cover for claims based on a complaint regarding the approval of a financial promotion.
• FCA: The FCA plans to exercise its existing supervisory and enforcement powers to secure redress where an Approver Firm fails to comply with the FCA's requirements. For example it may decide to impose a redress scheme on an Approver Firm where appropriate.

What next?

Subject to the progress of the Bill, the FCA plans to publish its feedback statement and final rules in H1 2023.

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.