Update on s.21 gateway: FCA consults on introducing gateway for firms which approve financial promotions for unauthorised persons

The FCA has set out its plans to operate a new gateway for the approval of financial promotions in its consultation published on 6 December 2022 (CP22/27).

Responses to the consultation are requested by 7 February 2023.

Who could be impacted?

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 impacted. For example, what will happen if the authorised firms they currently rely on do not apply for gateway permission to approve financial promotions or are refused permission by the FCA? Such firms will need to consider the extent to which they may lawfully be able to continue to communicate financial promotions using exemptions in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).

Overview

What is the gateway? Following an HM Treasury (HMT) consultation on the regulatory framework for approval of financial promotions in July 2020, HMT proposed amending the Financial Services and Markets Act 2000 (FSMA) so that authorised firms (Approver Firms) can no longer approve the financial promotions of unauthorised firms, unless the Approver Firm had 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 FSMA to implement this: authorised firms will be required to apply to the FCA for permission under new section 55NA FSMA before they can approve financial promotions of unauthorised businesses.

What will be the FCA's role within the gateway? The FCA will operate the gateway. The restriction on approving financial promotions will be referred to as the Financial Promotion Requirement (FPR). Approver Firms will need to apply to the FCA for permission to have the FPR varied or cancelled. The permission that Approver Firms must have to approve financial promotions is separate from the Part 4A permission to carry on regulated activities.

What are the proposals in CP22/27? The consultation sets out the FCA's proposals on how it intends to operate the gateway. This includes the FCA's 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. There are also proposals for ongoing notification and reporting requirements applicable to s.21 approver firms:

• For firms which apply at the gateway, CP22/27 proposes that each firm 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 also 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. Although the FCA proposals are only applicable to authorised firms, unauthorised firms should consider how they may be indirectly impacted, for example, Approver Firms may scrutinise financial promotions more carefully in future and may expect to charge more for their service. 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. 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 consultation response set out plans for a transition period on introduction of the s.21 gateway. If this transition period is legislated for as set out in the consultation response, it would begin as soon as the initial application period closes. The length of the application period will be determined by secondary legislation. Firms that apply at the gateway within the application period will be allowed 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 for which they have applied for permission to approve promotions, the firm will need to cease s.21 approval activity immediately in relation to that product type once their application has been determined.

Fees

In its recent consultation on regulatory fees and levies (CP22/23), the FCA proposes a £5,000 fee for processing financial promotion gateway applications to add new financial promotions products. Applicants will be charged separately for each new application, although there does not appear to be a limit on the number of product types within a single application. Where an applicant also applies for a Part 4A permission, the applicant will only be required to pay one fee - the higher one. A firm which already has a permission under section 55NA and subsequently applies to extend its scope, for example to promote additional financial products, will be charged 50% of the fee (i.e. £2,500). There will not be a charge for firms reducing the scope of their permission.

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 the 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 and 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.

How does CP22/27 fit in with the FCA's recent policy statement on strengthening financial promotions?

The FCA published its policy statement on strengthening its financial promotion rules (PS22/10) in August 2022 (see our briefing on PS22/10 here). PS22/10 introduced new requirements, the majority of which apply from 1 February 2023 (including changes to the categorisation) of investments depending on their risk profile; measures to strengthen the consumer journey such as strengthening risk warnings, banning inducements to invest, introducing positive frictions, improving client categorisation and stronger appropriateness tests). PS22/10 also included new rules placing more responsibility on Approver Firms of financial promotions that are subject to the rules in COBS 4 (primarily approvals for investments). These rules are intended to complement the s.21 gateway and include new requirements for Approver Firms relating to competence and expertise, conflict of interest, ongoing monitoring of approved promotions (including attestations of no material change).

What next?

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

S.21 approval activity is expected to increase in the future, because:

• Ongoing proposals to tighten several exemptions in the FPO - high-net worth and sophisticated investors exemptions - which many unauthorised firms currently use to lawfully communicate their financial promotions may lead to such firms seeking an Approver Firm for their promotions.
• The government also intends to bring cryptoassets within the financial promotion regime. When this happens, unless an FPO exemption applies, unauthorised firms promoting qualifying cryptoassets will need to have their financial promotions approved by an Approver Firm.
• Changes to the buy-now-pay-later financial promotions perimeter is also expected to result in an increase in approval activity.

FCA resources on approval of financial promotions

• FCA CP22/27
• FCA PS22/10
• FCA CP22/2
• FCA non-handbook guidance on approving financial promotions (Annex 2 of PS22/10 contains updated non-handbook guidance which will be published on the FCA website on 1 February 2023)
• Firms' approvals of financial promotions: the FCA's expectations (April 2019)
• FCA Dear CEO letter on clarify in promotions about regulated and unregulated business: the FCA's expectations (January 2019)
• The FCA’s supervisory approach to financial promotions in social media (FG15/4) (March 2015)
• Financial promotions – guidance on "prominence" (September 2011)