There are several provisions being introduced by the Financial Services and Markets Act 2023 (FSMA 2023) which are of great interest to those firms and individuals in the financial services sector.
Our blog focuses on those new provisions brought in by section 20 of FSMA 2023 in relation to financial promotions.
Section 20 FMSA 2023 changes the current regime surrounding the restrictions on financial promotions, building on those measures brought in by the Financial Services and Markets Act 2000 (FMSA 2000) by enhancing the restrictions on the ability of unauthorised firms to communicate financial promotions to consumers.
Background of Financial Promotion
Financial promotions (as defined by FSMA 2000 as "an invitation or inducement to engage in investment activity, communicated by a person in the course of business") can only be communicated if the communication is made by an authorised firm or with the approval of an authorised firm, or where an exemption otherwise applies.
Assuming another exemption does not apply and given the challenging process of becoming an authorised firm, the easiest and most typical route for an unauthorised firm to take to legally communicate a financial promotion is by obtaining approval from an authorised firm.
Currently, where an authorised firm approves a financial promotion under s21 FSMA 2000, that firm is responsible for ensuring that the financial promotion is compliant with all of the Financial Conduct Authority (FCA) rules which are applicable (such as ensuring that the promotion is clear, fair and not misleading).
This regime has caused some key concerns for the FCA, including:
- that there was a lack of specific expertise within the authorised firms for approving relevant promotions, especially in the sectors and areas in which firms were approving certain financial promotions (which may not be within their particular sectors or area of expertise);
- that there was not sufficient due diligence being undertaken by authorised firms when evaluating whether to approve certain financial promotions. In particular, it is unclear how firms were ensuring that all of the FCA rules were being satisfied; and
- that there was a general lack of oversight on the part of the FCA as they were not a part of this process of approval.
Therefore, the FCA is seeking to ensure that the regime has sufficient safeguards to ensure that approval by an authorised person is an appropriate and effective way of protecting consumers from financial promotions that do not satisfy the FCA rules and are potentially damaging to consumers.
The effect of these new provisions is that authorised firms will now need to obtain permission from the FCA to approve financial promotions.
It is anticipated that obtaining this permission from the FCA will be a challenging process given the high standard that the FCA are likely to hold firms to when approving financial promotions.
Given the issues with the previous regime outlined above, the FCA is likely to place specific emphasis on the following:
- evidence that there are individuals within the firm with the relevant level of experience and expertise necessary to enable the firm to approve financial promotions and that those individuals are not seeking to approve promotions which are beyond their sphere of knowledge and expertise; and
- that firms are undertaking a sufficient and appropriate level of due diligence into those promotions which they are seeking to approve. This includes the requirement for authorised firms to show how they will ensure that the financial promotion is fair, clear and not misleading and otherwise complies with applicable financial promotion rules, as well as how the firm will ensure that the propositions described in the promotions are genuine and authentic.
These new provisions will come into full force on 7 February 2024.
However, from 6 November 2023, the FCA is now accepting applications for permission to approve financial promotions made between 6 November 2023 and 6 February 2024.
The new requirement for permission from the FCA in respect of approving financial promotions will not apply in the following situations:
- where the authorised firm approving the communication is also the same firm that prepared the content of the communication. Therefore, an authorised firm can approve its own promotions, which are subsequently communicated by an unauthorised firm.
- where an unauthorised firm prepares the content of the communication and is in the same corporate group as the authorised firm that approves the communication.
- where an authorised firm accepts responsibility in relation to any regulated activity and appoints a representative that is an unauthorised firm, and the principal approves the communication which is prepared by the unauthorised firm.
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.