Coffee may be for 'closers', but what do 'approvers' drink?

In this article, James Kaufmann considers the FCA’s new regime which requires those who approve ‘financial promotions’ for others to be expressly and separately approved to do so by the regulator.

What is changing?

The Financial Conduct Authority (the FCA) published policy statement PS23/13 on 12 September entitled ‘Introducing a gateway for firms who approve financial promotions’. PS23/13 sets out the timeline and the FCA’s (near) final rules which will govern their new framework and gateway for firms who approve financial promotions. The changes have been in the works for a while, and so it’s not a surprise. But having a deadline makes things more real and will force FCA authorised firms to make decisions in good time so they ensure they are well prepared for this new regime.

The new rules are the final part of a process which includes legislation being brought in by the Government in the Financial Services and Markets Act 2023, which in turn altered the provisions of the ‘financial promotions’ prohibition set out in section 21 (s21) of the Financial Services and Markets Act 2000 (FSMA). In a nutshell, the upshot has been to create a regulatory gateway (the s21 gateway) for all FCA authorised persons that want to approve financial promotions for unauthorised persons (s21 approvers). Once the gateway comes into effect (from 7 February 2024), all FCA authorised persons that want to approve financial promotions for others will need to apply to the FCA for permission to do so.

This has been a cause celebre for the FCA. The FCA has said that ‘we have 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 financial promotions and the underlying products are inappropriate for them…We expect this framework to produce a higher degree of compliance with our financial promotion rules, leading to a generally raised standard of these promotions.’ The FCA considers the happiness of consumers to be of paramount (almost sacred) importance. With this in mind, then, the new regime is the FCA’s attempt to ensure that consumers are protected. (Especially noteworthy is the FCA’s statement at 1.11 of PS23/13: ‘In considering what degree of protection may be appropriate, the FCA must have regard to the general principle that consumers should take responsibility for their decisions. But consumers’ ability to take responsibility for their decisions may be limited, especially if they are in vulnerable circumstances. We aim to use our regulation to address the imbalance in knowledge about financial services between firms and consumers.’ If we follow this sentiment, the FCA seems to be saying that it does not want to see an industry where authorised firms are any more expert than their customers(?) (No, I don’t get it either.))

Timeline

FCA authorised firms will be able to submit applications for permission to approve financial promotions from 6 November 2023. The initial application period will close on 6 February 2024.

Between 6 November 2023 and 6 February 2024, existing authorised persons will be able to apply to the FCA for permission to approve financial promotions during an initial ‘application period’.

On 7 February 2024, the new rules will come fully into force and firms that have not applied to the gateway will no longer be able to approve financial promotions (subject to exemptions – see ‘Who is affected’ below). From 7 February 2024, existing authorised persons that apply for permission during the application period will be able to continue approving financial promotions for unauthorised persons while the FCA determines their application (the ‘transitional period’). The transitional period will start on 7 February 2024 and end on a firm‑by‑firm basis when the FCA has determined a firm’s application. If a firm’s application is successful, they will see no interruption to their ability to approve financial promotions. If the FCA refuses their application or the permission granted does not cover approvals for certain types of product for which they have applied for permission, the firm will need to cease the relevant s21 approval activity once the FCA have determined their application. (If a firm approves a financial promotion during the transitional period, this will remain valid after the FCA has determined the firm’s application. This will be the case even if the FCA refuses the application or the permission granted does not cover the relevant type of product. Any continuing obligations of the firm for the approved promotion (e.g., ongoing monitoring) continue to apply even if the firm is no longer entitled to approve the relevant financial promotion. The same principle applies to firms that do not apply to the s21 gateway, but have approved financial promotions in the past, that are still being communicated. In such a scenario, if the firm became aware that the financial promotion no longer complied with the financial promotion rules, it should withdraw its approval (as it could not approve amendments to the financial promotion))

The statutory deadline for determining these applications is six months for a complete application and 12 months for an incomplete application. But we know from the recent past that a high level of applications can lead to delays beyond this timescale. So, if approving third party financial promotions matters to your business, you want to apply early in the process and be at the front of the queue.

Who is affected?

This new regime will affect FCA authorised persons who approve, or intend to approve, financial promotions for unauthorised persons. It will not affect authorised persons that only approve their own financial promotions for communication by an unauthorised person, the financial promotions of their appointed representatives for the regulated activities they have accepted responsibility for, or the financial promotions of unauthorised persons within their corporate group.

What is the current position?

Generally, a person can only lawfully communicate a financial promotion in the UK if:

• they are an FCA authorised person;
• an authorised person has approved the content of the financial promotion; or
• an exemption applies.

Prior to the FCA’s changes, any authorised person can generally approve financial promotions for unauthorised persons. The high profile mini-bond crisis showed (in the FCA’s opinion) that FCA authorised firms approved non‑compliant financial promotions which were then communicated by unauthorised persons to consumers. As a result, consumers for whom the products and services promoted were inappropriate were harmed. The FCA says it has also seen evidence of consumers investing in high‑risk products that do not match their risk tolerance, due to poor‑quality approved financial promotions.

How do we apply to be a s21 approver?

The FCA will accept applications from 6 November 2023, but has already published the questions applicants will need to answer. As such, firms can start now to consider their answers and preparing their application.

Recently, the FCA has clearly moved the goalposts in terms of their expectations for applications across the board. In PS23/13 the FCA has helpfully given pointers to what they expect of s21 applicants and applications. And there are a number of things that firms can do now at the outset to maximise chances of a successful application.

The FCA expects firms to have a thorough understanding of a range of materials before applying. This expressly includes:

• FCA’s website – firms need to review any relevant webpages and the FCA’s approach to assessing applications in the FCA’s policy statement;
• FCA Handbook and relevant guidance – firms need to be familiar with the financial promotion rules relevant to your sector. And the FCA has listed specific chapters of the FCA Handbook. If the crypto applications a while back were anything to go by, the FCA expects applicants to know these matters back to front and inside out. So, applicants need to start cramming; and
• independent legal/compliance advice – the FCA expects firms to consider seeking independent legal/compliance advice as part of preparing your application. Again, a takeaway from other applications recently has been that the FCA expects firms to have taken external advice so that applications are complete and comprehensive at submission. ‘Good enough’ is not good enough.

This final point is reflected in the FCA’s expectation that applications are complete and comprehensive at submission. The FCA expects:

• applications are complete – all questions on the application form are answered. No gaps and any relevant supporting information is included. All documents and information must be up to date. The FCA no longer accepts draft documents;
• self-reliance – the FCA expects firms to ‘submit a comprehensive application of the highest quality. Please don’t expect us to guide you through completing your application, or to recommend solutions or mitigating actions when we identify concerns with, or deficiencies in, an application.’ This comes back to the point above. And means that firms need to ask advisors for assistance at the outset to improve a swift and positive outcome;
• firms meet the FCA’s standards to be granted approver permission – the FCA expects firms to be able to demonstrate how they meet the FCA’s minimum standards (the threshold conditions); and
• firms have the competence and expertise to approve promotions of the type(s) they are applying for permissions for – this is for firms to assess and the FCA to consider. In general, the FCA expect the types of financial promotions that firms intend to approve to align with the investment types in relation to which they have permission to carry on regulated activities. (‘For example, we wouldn’t usually expect a firm with only consumer credit permissions to apply for permission to approve financial promotions relating to investments such as shares and debt securities.’)

How much does an application cost?

A s21 gateway application will carry a £5,000 fee.

We would be happy to discuss with you our fees for supporting firms in their application process. We have put together a standard scope and package for clients, which is well below the FCA’s own application fee.

What do we know about how the FCA will determine applications?

The FCA may refuse an application for permission to approve financial promotions if it is desirable to do so to advance one or more of their operational objectives, especially their objective of securing an appropriate degree of protection for consumers. In practical terms, the FCA has stated that in order to be approved s21 gateway applicant firms will need to demonstrate:

• that they have processes in place for maintaining adequate records of the financial promotions they approve;
• how they will satisfy themselves that a service will be provided where the financial promotion relates to a service to be provided by the issuer of the promotion;
• how they will ensure that the propositions described in promotions are commercially viable;
• that they have adequate systems, controls and processes in place to ensure that the promotions which they approve comply with FCA rules;
• the steps they have taken to identify whether by approving financial promotions there are any additional risks presented to them, and confirmation of how those will be mitigated;
• that they have the individuals they need to approve financial promotions of the type(s) in relation to which they are seeking permission, including individuals with appropriate competence and expertise;
• that they have sufficient resources to undertake their proposed approvals and that they have considered the volume of promotions they intend to approve and the revenue they intend to generate from this; and
• that they have a process in place should they decide to withdraw an approval of a promotion.

Accordingly, firms need to have considered the above issues and be clear on these matters before attempting any s21 approver application.

Applications will undergo a ‘proportionate and robust’ assessment based on the types of promotions the applicant intends to approve. The assessment process for applications that pose the highest risk of causing harm will include conducting more extensive due diligence on the applicant, and may involve conducting interviews with key individuals (This is in many ways reminiscent of how they ‘managed’ the cryptoasset AML registration process.) What we know so far is:

• the FCA requires firms to possess the ‘necessary competence and expertise’ relating to the products for which they approve financial promotions. But the FCA is not prescriptive as to how that knowledge or experience might be manifested or evidenced. The FCA expects firms to apply discretion, and to maintain what ‘would reasonably be considered as an acceptable level of competence’;
• the FCA expects firms to maintain in‑house expertise upon which the s21 approval permission granted is based. This means replacing relevant employees if they move on with staff who have the requisite competence and expertise to approve the relevant types of financial promotion. If a firm loses this expertise, they should cease approving promotions for products related to this expertise, notify the FCA in good time and consider varying their permission in response;
• it is necessary for a s21 approver to establish whether the promoted product is commercially feasible and reasonably capable of achieving what is being promoted. However, the FCA expressly states that ‘Approving a financial promotion is not to be regarded as constituting a recommendation to purchase a product on the part of the approver’. Instead, a s21 approval is an assessment that the claims made in a promotion are reasonably capable of being attained (i.e., not exaggerated or implausible). The FCA considers that this is a core part of assessing whether a promotion is clear, fair and not misleading; and
• just because a firm may approve financial promotions relating to a particular type of investments, it does not mean that the firm should or could approve any and every financial promotion relating to an investment of that type. The FCA expects each s21 approver to consider carefully whether it has the competence and expertise to approve a promotion of any investment which it is approached to approve and should refuse to provide an approval if it does not consider itself equipped to provide that approval in a compliant way.

What reporting requirements are there?

The FCA is introducing both ad hoc notifications and periodic reporting.

S21 approvers will have seven days to notify the FCA of approving a financial promotion when the promotion relates to a product subject to marketing restrictions (i.e., non‑mass market investments such as P2P investments, mini-bonds or unregulated collective investment schemes) or cryptoassets. A copy of the approved promotional material must be uploaded to the report.

The FCA may also request that individual firms submit notifications when approving promotions for other financial products or services (i.e., financial promotions for ‘mainstream’ products).

In addition, the FCA requires notification when a firm approves amendments to, or withdraws an approval of, a 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’ may (amongst other things) relate to: (i) an element of an approved financial promotion that could cause harm to consumers; or (ii) the integrity or propriety of an unauthorised person for whom a firm has approved a promotion. The FCA considers such a concern may arise when a s21 approver becomes aware that the promotion poses a risk of harm to consumers, or the unauthorised person associated with the approved promotion has provided misleading information, or has engaged in other deceptive or even fraudulent activities.

And there is the fallback that even where a s21 approver is not required to make a notification to the FCA under the express rules of the new regime, they should consider whether a particular matter is one of which they would reasonably expect notice (under Principle 11).

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

Finally, the FCA will require s21 approvers to report every six months the total approved promotions in the period to be broken down by type of products being promoted and ‘marketing restriction’ categories that apply to the promoted products (if any). S21 approvers must submit a return even if they have not approved any financial promotions or received any relevant complaints during a reporting period.

For further information and support, please get in touch.