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Compliance

The Government launches consultation on a new regulatory framework for the approval of financial promotions for unauthorised firms.

Posted on 27 Aug 2020

Under the current rules, when an unauthorised firm communicates a financial promotion, this requires the approval of the promotion by an authorised firm unless an exemption set out in the Financial Promotions Order 2005 is applicable.

The Government is considering bringing in new rules to strengthen this process and provide additional safeguards. Previously there has been some criticism of the safeguards including inadequate due diligence on the financial promotion, and the approval of financial promotions that are beyond the expertise of the authorised firm.

These failures can, in the view of the Government, cause the following consumer harms:

  • Unrealistic claims of high returns, leading consumers to invest in unsuitable products,
  • Consumers may be diverted away from more appropriate products, and;
  • Negative impact on consumer confidence more generally.

The view is that a simple requirement for an authorised firm to approve of a financial promotion is insufficient. There must be a process to assess that an authorised firm is suitable and competent before it can approve financial promotions from unauthorised firms. This is why the new proposals will establish a regulatory ‘gateway’, in the form of permission from the FCA, which a firm must pass through before it can approve financial promotions of unauthorised firms.

The regulatory ‘gateway’

The Government plans to amend FSMA so that the ability of authorised firms to approve the financial promotions of unauthorised firms is restricted only to authorised firms that have the relevant permission of the FCA.

This gateway will not impact the ability of authorised firms to approve of financial promotions of unauthorised persons within the same group, or to financial promotions produced by an authorised firm but distributed by unauthorised persons.

The Government believes that the new gateway will lead to the following benefits:

  • More effective oversight and supervision of financial promotions. Under the current regime, the FCA does not have a clear view of what financial promotions by unauthorised firms authorised firms are approving; this new system will allow the FCA to focus their supervision on these firms. The FCA would then be able to understand what kinds of financial promotions are being approved and whether the authorised firms have sufficient expertise. Using this data the FCA can focus its efforts on higher-risk products, such as the marketing of minibonds, as highlighted by the collapse of London Capital and Finance last year.
  • The FCA will be able to ensure that unsuitable firms are unable to approve of these financial promotions and ensure that only firms with suitable expertise can approve. This will help to reduce harms to consumers from poor financial promotions.
  • Improved due diligence by authorised firms. The gateway will allow the FCA to assess the due diligence authorised firms are conducting on the financial promotions that they are approving. The Government is of the view that the gateway will ensure that authorised firms apply a more rigorous approach to the due diligence it conducts.

Structure of the gateway

The Government is considering two options for how the gateway will work as part of this consultation:

  1. Require all authorised firms to not approve financial promotions made by unauthorised firms. This would involve a blanket restriction placed upon all firms, and an authorised firm would have to apply to the FCA to remove or alter this restriction. Where a firm makes an application regarding this restriction, the FCA will be able to alter the restriction to allow for the approval of financial promotions within the relevant firm’s area of expertise.
  2. Introduce a new ‘regulated activity’ of approving financial promotions for unauthorised firms. This would mean that an existing firm would have to apply for this new regulatory permission to approve financial promotions. Making the approval of financial promotions a standalone regulated activity would represent a more significant regulatory change. Such a large change may be disproportionate, as the Government is not intending to change the role of authorised firms in the approval of financial promotions of unauthorised firms, only to improve the ability of the FCA to oversee this process and introduce greater safeguards to protect consumers.

In both cases, new firms would be able to request the ability to approve these financial promotions as part of their application for authorisation. As of the start of this consultation, the Government is more in favour of option one, the introduction of a restriction on all authorised firms.

At this stage, the Government is consulting on whether a gateway should be established and if so, which option should be chosen. The consultation will run until October 2020 after which the Government will announce its chosen way forward.


How can we help?

At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are compliant and aware of all the risks outlined in this update. Whether this is through assisting with new policies and procedures that need to be put in place or providing online training for staff to make them fully aware of the regulatory burden.

Laven has also built Laven Tech software solution that leverages advanced technology combined with our vast subject matter expertise. Laven Tech is designed to assist fund managers, service providers and investors to meet today’s growing demands.

Click here to find out more.