New FCA regime for financial promotions approval: What firms need to know

Walker Morris Regulatory & Compliance Partner and financial services expert Andrew Northage summarises the new regime and the key takeaways for regulated and unregulated businesses in this sector.

What’s happening?

FSMA 2023 includes an amendment to section 21 of FSMA 2000 – which sets out how a person can lawfully communicate a financial promotion in the UK – to create a new regulatory gateway for all authorised firms wanting to approve financial promotions for unauthorised persons, subject to the exemptions listed below.

The FCA says in its policy statement, which sets out the final approach to implementation, that the ‘robust’ gateway assessment will ensure only firms with the necessary competence and expertise to effectively assess whether promotions for particular products comply with its rules, can approve financial promotions for unauthorised persons.

Note that an authorised firm will not require permission to approve the following financial promotions:

• Their own for communication by unauthorised persons.

• Those of their appointed representatives for the regulated activities the authorised firm has accepted responsibility for; or

• Those of unauthorised persons within their corporate group.

When?

The initial window for submitting permission applications runs from 6 November 2023 to 6 February 2024, after which the new regime comes fully into force. See below for more about timings, next steps and other requirements.

Why?

The FCA explains that the new regime is designed to set and test higher standards and ensure better consumer protection from misleading financial promotions. The regulator has seen too many non-compliant promotions being approved and then communicated by unauthorised persons to consumers. Consumers have been harmed where they have relied on these promotions and the underlying products are not appropriate for them. The FCA hopes to reduce the frequency of a mismatch between consumers’ financial decisions and their needs by ensuring that financial promotions clearly state the risks involved in buying the promoted product or service.

There’s been a flurry of activity over the last year or so in relation to financial promotions. In December 2022 and February 2023, we saw new rules and guidance to strengthen the financial promotion rules for high-risk investments and firms communicating and approving financial promotions [1]. And tough new rules on the marketing of cryptoasset products came into force just last week (more on that below).

The new regime has come about against the wider backdrop of the cost-of-living crisis and the ever-increasing exposure of consumers to financial promotions online. The FCA consulted over the summer on guidance for communicating or approving financial promotions on social media. The Online Safety Bill – which places duties on platforms to manage the risks from illegal content such as illegal financial promotions – is also shortly set to become law. We’ve also recently seen implementation of the FCA’s pervasive Consumer Duty [2]. Other initiatives include a proposed anti-greenwashing rule which, if implemented, will also need to be complied with by firms approving promotions for unauthorised persons.

Timings, next steps and other requirements

Applying for permission: Timings

In-scope firms must apply for permission during the initial application window of 6 November 2023 to 6 February 2024 if they want to continue approving financial promotions for unauthorised persons. They will need to submit a ‘variation of permission’ application which specifies, among other things, the product types they want to approve financial promotions for, and tailor the application accordingly.

Firms applying during that window will benefit from a transitional period, so will be able to continue to approve financial promotions while the FCA determines their application. The FCA has six months to determine a complete application and 12 months to determine an incomplete one. Approval of a financial promotion pending that determination will still be valid, regardless of the outcome. Note that continuing obligations in respect of an approved promotion will continue to apply where an application is unsuccessful. (The last point also applies in respect of past approvals which are still being communicated, where no application for permission is made.)

From 7 February 2024, in-scope firms that haven’t applied will not be able to approve financial promotions. They can submit a variation of permission application but won’t benefit from a transitional period. This means they won’t be able to approve financial promotions until the FCA determines the application in their favour.

Firms applying for authorisation to carry out regulated activities will also be able to apply for approver permission from 6 November 2023. Those that have already applied for authorisation will be able to add an approver permission application to their existing application through their FCA case officer. This will be treated as a separate application. Firms applying for authorisation from 6 November 2023 will be able to apply for approver permission within their authorisation application form.

Applying for permission: Some points to note

Annexes 1 and 2 of the policy statement set out the questions that will need to be answered when applying. This FCA webpage explains more about what’s required, including: fully explaining the types of promotion the firm intends to approve and what expertise it has to approve them; having the required policies, systems and controls in place; and providing details of any approvals given over the past 12 months.

Note that the FCA says it’s up to firms to submit a comprehensive application of the highest quality. They shouldn’t expect the FCA to guide them through the process.

Annex 3 contains updated non-Handbook guidance and Appendix 1 contains the near-final Handbook rules and guidance (these are not expected to change). Firms considering whether to apply for permission should also review and consider these carefully.

The following points to note came out of the FCA’s response to the feedback it received on the new regime:

• Applicants will be assessed by reference to the relevant rules that apply to the promotions of the type they have indicated they wish to approve.

• The FCA won’t require firms to update it when individuals fulfilling the role of approving promotions are replaced by other employees, but it does expect firms to maintain their in-house expertise on which the permission granted is based.

• While the FCA requires firms to possess the necessary competence and expertise relating to the products for which they approve financial promotions, its approach is not prescriptive as to how that knowledge or experience might be manifested or evidenced.

• Just because a firm applies for, and obtains, permission to approve financial promotions relating to investments of a particular type, doesn’t mean that the firm should thereafter consider that it should or could approve any and every financial promotion relating to an investment of that type.

• To assess whether a promotion of a financial product fairly represents the product being promoted in a way that’s not misleading, it’s necessary for the approver to establish whether the promoted product is commercially feasible and reasonably capable of achieving what’s being promoted.

Reporting requirements: Bi-annual report

In-scope firms granted permission to approve financial promotions will be required to submit bi-annual reports containing the following information:

• Total number of approvals (broken down by type of product being promoted and any applicable ‘marketing restriction’ categories that apply to the promoted products).

• Total number of consumer complaints for approved promotions.

• Revenue from section 21 approval activity (i.e., revenue received as a result of the fee charged for approving a promotion, not revenue generated from sales of the product being promoted); and

• Total revenue, regulated and unregulated.

Firms must also give the FCA reasonable notice if they intend to begin or cease approving financial promotions for products subject to marketing restrictions, using a SUP15 notification form.

The first report should be submitted to the FCA within 30 business days following whichever comes first of the firm’s Accounting Reference Date (ARD) or six months following their ARD after 7 February 2024 (or, if the firm applied for permission after the initial application period, after the date they were granted permission).

Reporting requirements: Notifications

Firms granted permission must also notify the FCA within seven days of:

• Approving a financial promotion for a qualifying cryptoasset or a product subject to a mass-marketing restriction (i.e., non-mass market investments such as speculative illiquid securities), regardless of whether the promotion is intended to be communicated to retail clients.

• Approving amendments to, or withdrawing approval of, a financial promotion due to a ‘notifiable concern’. This will apply in relation to approvals of any financial promotion, regardless of the type of product or service to which it relates. A ‘notifiable concern’ is a concern that relates to an element of an approved financial promotion that could cause harm to consumers. It may also relate to the integrity or propriety of an unauthorised person for whom a firm has approved a promotion.

These notification requirements apply from 7 February 2024, whether or not the firm benefits from the transitional period.

What about cryptoassets?

The financial promotions regime was extended to promotions of qualifying cryptoassets on 8 October 2023. The FCA published its rules and a supporting guidance consultation in June 2023. The routes to lawfully communicate cryptoasset financial promotions to UK consumers are now as follows:

• The promotion is communicated by an authorised person.

• The promotion is approved by an authorised person.

• The promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the Money Laundering Regulations 2017 but which is not an authorised person; or

• The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.

On 7 September 2023, the FCA announced that it will consider giving cryptoasset firms more time to implement certain aspects of the new financial promotions regime. Firms could be given until 8 January 2024 to introduce features that require greater technical development. And on 21 September 2023, the FCA published a final warning for cryptoasset firms, and those supporting them, about the new rules.

New FCA regime for financial promotions approval: How we can support you

There’s a lot to take on board. Firms should start thinking now about whether they need to apply for permission and start pulling together the detailed information and supporting documents required. Don’t leave it to the last minute if you want to continue approving financial promotions for unauthorised persons without interruption.

Our financial services experts have a great deal of experience. Please contact Andrew if you have queries about any of the points raised in this briefing, need assistance with applying for permission or advice on how the changes may affect you, or have concerns over any other regulatory or compliance issue.

[1] See our earlier briefing

[2] See our earlier briefing