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Imminent changes to financial promotion exemptions: What you need to know

The Topline

The UK government has confirmed changes to financial promotion exemptions for high net worth individuals and sophisticated investors, effective 31 January 2024. While the government decided not to proceed with a proposal to place a greater degree of responsibility on firms, the changes are significant for businesses and investors alike. They include tightening the eligibility criteria, strengthening investor statements, and mandatory information requirements. Businesses must ensure compliance by the effective date.”

Andrew Northage, Partner, Regulatory & Compliance

Andrew Northage

An image of four stacks of coins sat on a document with financial graphs, a visual metaphor for the topic of this post: financial promotions exemptions.

HM Treasury consulted two years ago on proposed changes to the financial promotion exemptions in the Financial Promotion Order for high net worth individuals and sophisticated investors. The government has now confirmed the final changes which will apply from 31 January 2024.

Regulatory & Compliance Partner and financial services expert Andrew Northage considers what businesses need to be aware of to ensure ongoing compliance.

What’s it all about?

As we explained in our earlier briefing, the exemptions disapply the effect of the financial promotion restriction in section 21 of FSMA 2000 that an unauthorised person must have its financial promotions approved by an authorised person before they are communicated. The aim is to allow SMEs to raise finance from so-called ‘business angels’, without the cost of having to comply with the financial promotion regime.

The consultation came about as a result of: various economic, social and technological changes; instances of misuse; and a lack of engagement with the exemption requirements among investors. The reforms are part of a wider package of recent consumer protection initiatives.

Confirmed changes to the financial promotion exemptions

Taking into account stakeholder feedback, the government decided to go ahead with the following changes:

  • Increasing the financial thresholds to be eligible for the high net worth individual exemption to:
    • Income of at least £170,000 in the last financial year (up from £100,000); or
    • Net assets of at least £430,000 throughout the last financial year (up from £250,000).

The government says that it recognised the important role of angel investment in the economy when deciding to raise the thresholds in line with inflation and no higher. Consultation responses indicated that the further the thresholds were raised, the greater the corresponding negative impact on angel network participation and the ability for SMEs to raise capital, particularly for younger start-ups.

  • Amending the criteria to be eligible for the self-certified sophisticated investor exemption by:
    • Removing the criterion of having made more than one investment in an unlisted company in the previous two years; and
    • Increasing the company turnover required to satisfy the ‘company director’ criterion to £1.6 million. This is in line with inflation.
    • Requiring businesses to provide details of themselves in any communications made using the exemptions. This includes: company address; contact information; and the company’s registration number.

    Following strong disagreement from respondents, the government decided not to proceed with its original proposal to place a greater degree of responsibility on firms. This included shifting the ‘reasonable belief’ emphasis so that firms communicating the financial promotion must have a reasonable belief that an individual meets the exemption criteria, not simply that they have signed a relevant investor statement. Respondents said that the proposal would have too detrimental an impact on prospective investors’ ability to review investment opportunities, with a consequent impact on SMEs’ ability to raise finance.

    • Updating the high net worth individual and self-certified sophisticated investor statements. The three substantive changes are updating the format, simplifying the language and requiring greater investor engagement.

    The government says that the decision to tighten the eligibility criteria and strengthen the investor statements should reduce the opportunity for vulnerable individuals to be inappropriately marketed investments under the exemptions. But it says there will remain an onus on businesses to act responsibly when seeking to promote investments using these exemptions.

    • Updating the title of the certified high net worth individual exemption by removing ‘certified’.
      1. Applying these changes to the equivalent exemptions for promotion of collective investment schemes.

      Finally, the government confirmed that it currently has no plans to expand the scope of eligible investments for the purposes of the exemptions beyond unlisted companies.

      Timing

      The changes to the financial promotion exemptions come into force on 31 January 2024. Note that there is no transitional period.

      A business that has made a financial promotion to an individual before then will continue to be able to engage in relation to the financial promotion made and will not need to ask for an updated investor statement [1].

      New financial promotions from 31 January 2024 will need to be made in accordance with the updated exemptions. This is the case even if they are made to individuals already promoted to under the current exemptions.

      Interaction with the FCA’s financial promotion exemptions

      The consultation response notes that the FCA’s marketing restrictions also contain exemptions allowing promotion to high net worth individuals and sophisticated investors where relevant conditions are met. Following implementation of the above reforms, the FCA may decide to consult on updating its exemptions to reflect some or all of the changes being made here.

      There was some misunderstanding among respondents about application of the two different sets of exemptions. The response explains that the FPO exemptions remove a promotion entirely from the FCA’s financial promotion rules. They can only be used to make financial promotions in relation to unlisted companies. The exemptions in the FCA regime apply across a wider range of financial promotions, including in relation to unlisted companies. Where the exemptions in the FCA regime are used, some financial promotion rules in the FCA’s Handbook still apply. This includes the requirement for promotions to be clear, fair and not misleading.

      Focus on consumer protection

      The changes to the financial promotion exemptions follow a number of other recent financial services consumer protection initiatives:

      • Strengthening of the FCA’s financial promotion rules for high-risk investments and firms communicating and approving financial promotions – see our briefing.
        1. Changes to the FCA’s appointed representatives regime – see our briefing.
          1. A new FCA regime for financial promotions approval – see our briefing.
            1. Extension of the FCA’s financial promotion regime to promotions of qualifying cryptoassets.

            Financial promotion exemptions: How we can support you

            Please contact Andrew if you: have queries about any of the points raised in this briefing; need assistance with preparing for the upcoming changes or advice on how they may affect you; or have concerns over any other regulatory or compliance issue.

             

            [1] This is under Article 14 of the FPO which allows subsequent follow-up financial promotions relating to the same matter within 12 months of the recipient receiving the first communication, where relevant requirements are met.

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