On 6^th December 2022 the UK Financial Conduct Authority (“FCA”) published Consultation Paper 22/27 (“CP22/27”) to take soundings on proposals on how to operationalise a new “gateway” for firms authorised under the Financial Services and Markets Act (“FSMA”) that wish to approve financial promotions on behalf of unregulated third parties. In this circular, we examine these proposals.

 

What is the current state of play?

 

At present, any authorised person can approve financial promotions for unregulated businesses.

How will things change once the “gateway” enters into force?

 

Firms that approve financial promotions on behalf of unregulated third parties will need to seek approval from the FCA to do this / continue doing this. In short, this will be the “gateway”.

 

Why is the UK Government seeking to introduce the gateway?

 

The Financial Services and Markets Bill is seeking to amend the current financial promotions regime because there are concerns that:

 

• the proliferation of social media has led to a growth of unregulated social media influencers pushing risky investments through misleading or manipulative communications that do not explain potential downsides adequately or at all;

 

• firms are approving financial promotions for products that are outside their areas of expertise and/or which fall outside their own permissions;

 

• the approval of third-party financial promotions without the performance of proper due diligence has become too common; and

 

• the FCA is unable to effectively supervise the activities of approving firms because they have become more numerous since the original regime was conceived. Accordingly, the FCA usually only becomes aware of an issue once it has materialised.

 

These weaknesses increase the risk of consumer harm. In keeping with the Consumer Duty, the UK Government and FCA want to:

 

• restrict unsuitable firms from approving financial promotions;

 

• ensure that approvers have relevant expertise to conduct a robust assessment of financial promotions that are being proposed by unregulated third parties; and

 

• switch the FCA’s supervisory apparatus from being reactive to proactive.

 

How would a firm obtain approval permissions under the proposals?

 

Current approvers would be able to benefit from a transition period during which they would be able to submit a variation of permission application in Connect. During the transition period, firms that have applied will be able to continue approving promotions until their application has been determined. However, if a firm’s application is rejected then it must cease providing approvals with immediate effect.

 

Firms that do not apply within the period will be restricted from approving any financial promotions that fall outside an exemption (see further on in this article). Such firms would have to submit a variation of permission application to seek the relevant permissions.

 

The FCA is currently consulting on an application fee of £5,000.

We are not currently approving financial promotions on behalf of third parties. Should we submit a variation of permission application anyway just in case we decide to do this?

 

You should be aware that the FCA would reserve the right to amend or cancel a firm’s permissions if it does not engage in any approval activity in a 12-month period.

How would applicants for permissions to approve financial promotions be assessed?

 

In the proposals, the FCA outlines how applicants for approver permissions are likely to be assessed. Considering a range of data, including firm specific information (for example, complaints and qualifications) and market wide information (for example, market research and the activities of peers), the FCA’s assessment is likely to take into account:

 

• the competence and expertise of the firm’s staff to approve and monitor promotions relevant to the types of products and services that unregulated third parties intend to promote;

 

• whether the products and services that are the subject of financial promotions that a firm intends to approve are consistent with that firm’s Part 4A permissions;

 

• the robustness of the firm’s systems and controls to assess and monitor financial promotions, particularly in terms of taking action once deficiencies are detected, for example requiring amendments or withdrawing approvals. Initial assessment and ongoing monitoring should examine:

 

• how a proposed financial promotion complies with applicable legislation and regulations;

 

• whether the product or service to be promoted is commercially viable;

 

• the likelihood of the product or service being provided;

 

• the risks a promotion could pose to customers and the firm;

 

• any potential conflicts of interest that could arise, for example between advertised rates of return and fees, commission or charges levied for a service;

 

• the adequacy of the firm’s record keeping arrangements; and

 

• projected volumes of financial promotions that the firm believes it is likely to approve, considering whether this would make approving a viable commercial activity. In particular, the FCA will consider if the revenue generated would assist the firm in maintaining adequate financial and non-financial resources to continue and support its activities as an approver.

 

The FCA strongly encourages potential applicants to read the guidance issued in connection with its previous supervisory work before applying.

 

Under the proposals, what ongoing reporting requirements would approvers be subject to?

 

To help the FCA achieve its objective to become a proactive supervisor in this space, two reporting requirements would be imposed upon firms acting as approvers.

 

Post approval notification requirement

 

A firm would have to notify the FCA via Connect within seven days of approving, amending or withdrawing a financial promotion. Amendments would need to include the following information:

 

• Product name

 

• Product type

 

• Name of clients (unauthorised firms that produced and/or communicate)

 

• Size of issuance if relevant – unregulated securities

 

• Advertised rate of return

 

• Date of approval

 

• Medium of communication

 

• Date of withdrawal

 

• Reasons for material amendments

 

Bi-annual reporting requirement

 

On top of the post approval notification requirement firms would have to submit the following information via RegData for the preceding six month period:

 

• Total number of approvals in last period

 

• Total number of consumer complaints re: those promotions approved

 

• Revenue

 

• Total revenue from regulated and unregulated activities, showing the proportion of a firm’s business that comes from approval activity

 

If adopted as proposed, the bi-annual reporting requirement would enter into force once the application process has ceased and transaction period has begun (existing approvers) that have submitted a variation of permission) or once permission has been granted (new approvers).

 

What constitutes a “promotion” for the reporting purposes outlined above?

 

A promotion would equal one “set” of content for one campaign distributed through different media channels.

 

Will the compulsory jurisdiction of the Financial Ombudsman Service (“FOS”) be extended to the approval of financial promotions?

 

No. This is not being proposed.

 

Will there be any exemptions from the new regime?

 

Yes, the following three activities would be exempt under the current proposals:

 

• firms approving financial promotions to be distributed by their own appointed representatives;

 

• firms that approve their own promotions for onward distribution by an unregulated person; and

 

• firms that approve promotions on behalf of unregulated affiliates in their group.

 

Why are the proposals likely to be of particular interest to crypto asset firms?

 

The FCA states that because many crypto asset firms are not authorised with Part IV permissions, they are likely to place a heavy reliance on regulated firms to approve their content. The FCA believes that demand for the services of approvers from crypto asset firms is likely to exceed supply, at least in the immediate period after the new regime has entered into force.

 

What happens next?

 

Interested parties have until 7^th February 2023 to provide feedback to the proposals in CP22/27.

 

Once the FCA has considered the feedback received, implementation should move at pace, subject to the progress of the Financial Services and Markets Bill through Parliament (currently at 2^nd reading in the House of Lords). The FCA states that it expects to publish a Policy Statement in the first half of 2023.

About C&G

 

C&G has deep experience of operationalising regulatory requirements in a wide variety of business contexts. Please contact us if you have any queries about the contents of this circular.

References

 

2022. CP22/27: Introducing a gateway for firms who approve financial promotions. Financial Conduct Authority. Available at: https://www.fca.org.uk/publication/consultation/cp22-27.pdf (last accessed 6th January 2023).

 

2019. Approving financial promotions. Financial Conduct Authority. Available at: https://www.fca.org.uk/firms/financial-promotions-and-adverts/approving-financial-promotions (last accessed 6th January 2023).