Questions and Answers: The new gateway for firms that approve financial promotion

On the 6 December 2022, the Financial Conduct Authority ("FCA") published its consultation on a financial promotion approvals gateway. The consultation paper (CP22/27) considers how the gateway will operate, including how the FCA will assess applications.

Currently any authorised firm can approve the financial promotions of unauthorised firms. However, once the gateway is active, these firms will only be able to approve financial promotions if they have themselves obtained approval from the FCA (“FP Permission”). The proposed new approval regime will be incorporated into the Financial Services and Markets Bill 2022-23 ("FSMB") which is still making its way through the parliamentary process.

The consultation is open until 7 February 2023 and the FCA plans to publish its Policy Statement and final rules in the first half of 2023. This will be relevant for all firms that approve financial promotions of unregulated firms and will also be relevant for firms that rely on regulated firms approving their financial promotions.

We’ve received a number of questions from clients relating to the new regime, so we thought it would be helpful to set out some of the questions and our answers below.

We only approve financial promotions for our group companies, will we be required to apply for the FP Permission?

No, the current proposal is that there will be an exemption for approving financial promotions for an unauthorised business within the same corporate group.

We only approve financial promotions for our appointed representatives (“ARs”), will we be required to apply for the FP Permission?

No, the Treasury proposes to include an exemption for firms approving financial promotions for their ARs, where the promotion relates to a regulated activity for which the principle has the relevant permissions and has agreed to accept reasonability.

How do we apply for permission to approve financial promotions?

You will need to apply through the FCAs online platform, Connect, by submitting a Variation of Permission ("VOP") application. When applying you will need to state whether you are applying to be able to approve all types of financial promotions or only promotions that relate to certain types of investments / activities.

The FCA will have up to 12 months to determine applications for the FP Permission. The FCA currently proposes that there will be an application fee of £5,000.

Will there be a transition window?

Yes, the Treasury’s current plan is for there to be a transitional regime, which would allow firms that apply for the FP Permission during a transition window to be able to continue to approve financial promotions until their application has been decided by the FCA.

What if we are unauthorised but are currently applying for FCA/PRA authorisation?

Authorised firms wishing to approve financial promotions of unauthorised firms will need the FP Permission. If your application is well progressed you will likely need to apply for the VOP to obtain the FP Permission once you become authorised. If you become authorised before the end of the transitional window, however, you may be able to utilise the time before FP Permission is required to obtain the VOP.  

What information will we need to provide in the application for FP Permission?

While the consultation paper does not go into great detail on what the application form will look like, the consultation paper does set out the information upon which the FCA will base their decision. This includes details of the policies and procedures that you will use when determining whether to approve, or withdraw approval of, a financial promotion and the systems you have in place to record its assessment and decision.

For example, such policies and procedures will need to address:

• how you validate information in financial promotions (i.e., how you check that the information contained in the promotion is accurate)
• where the financial promotion relates to a service that will be provided, by the issuer of the promotion, to a customer, how you will satisfy yourself that the service will, in fact, be provided
• how you will ensure that that the promotions comply with the FCA’s rules
• how you will monitor promotions
• how you will assess whether there are any fees, commissions or other charges within the investment’s structure or elsewhere that could materially affect the ability of the product provider to deliver advertised or headline rates of return

  You will also need to demonstrate to the FCA that you:

• have the individuals and resources that are needed to approve and monitor the financial promotions of the type in relation to which you are seeking permission
• have considered the volume of promotions you intend to approve and the revenue you intend to generate from this activity
• have assessed whether by approving financial promotions you will be exposed to any additional risks, and how such risks will be mitigated

The FCA has stated that its assessment of whether to grant the FP Permission will be determined by reference to the operational objectives of the relevant firm.

Can we apply to approve financial promotions that relate to investment types / services that are not aligned to our permissions under Part4A of the Financial Services and Markets Act (“FSMA”)?

Yes, however, the FCA has stated that it would normally expect applicants to apply for permission to approve financial promotions for investment types which are broadly in line with their Part 4A permissions.

Where firms apply to be able to approve financial promotions of investment types that are beyond their Part 4A permissions the FCA will scrutinise more closely the systems and controls that the firm will maintain to ensure the compliance of those promotions.

What if the FCA rejects our application for the FP Permission?

Following rejection you will not be able to approve the financial promotions of unauthorised persons. The FCA will follow the same procedure as it does when rejecting permissions for authorisation under FSMA. Broadly, that means that the FCA will first issue a warning notice and then the firm may also be given a decision notice.

Once a decision notice has been issued, the firm has the right to refer the matter to the Upper Tribunal.

In practice, we expect that the FCA will inform a firm that they are minded to reject the application and offer the firm an opportunity to withdraw the application before any formal decision has been made.

What does this mean for crypto firms that are not authorised by the FCA?

The Treasury has stated its intention to expand the financial promotions restriction to include investment activity in relation to "qualifying cryptoassets”. For more details, see our article 'UK Financial Regulatory Update: Developments and Potential Impacts for Financial Services Firm'. However, the necessary legislation to introduce this amendment has not yet been made by the Treasury.

Once introduced, crypto firms that are not authorised by the FCA/PRA will only be able to make promotions in relation to a "qualifying cryptoasset” which have been approved by a regulated firm that holds the FP Permission (which includes permission for cryptoasset promotions). As a result of the introduction of the financial promotion gateway, there will be fewer firms able to approve such communications. Furthermore, we expect that the fees to approve communications will increase given the greater associated compliance costs. 

Are there any other new rules that firms must follow when deciding whether to approve financial promotions of unauthorised firms?

Yes, the FCA published a policy statement (PS22/10) in the summer setting out new rules that firms must follow when approving financial promotions of unauthorised firms. These rules require firms to do the following from 1 February 2023:

• the name of the approver and date of approval must be included on the face of an approved promotion
• the approving firm must self-assess that it has appropriate competence and expertise in relation to the financial product or service to which the promotion relates, before agreeing to approve it
• the approving firm must take reasonable steps to monitor the financial promotion on an ongoing basis, for the lifetime of that promotion, to ensure that it remains compliant with our rules
• the approving firm must obtain quarterly attestations of ‘no material change’ from the firm issuing the promotion, to assist it with its ongoing monitoring obligations
• the approving firm must take appropriate steps to identify and prevent or manage conflicts of interest in relation to its financial promotion approval activity.

Additionally, the FCA recently introduced tighter restrictions on the promotion of high-risk investments. Very broadly, different rules apply depending on the category of product, with mass marketing banned in respect of certain high risk investments (such as investments in unauthorised funds), and direct offer financial promotions being banned in respect of some medium risk investment (such as unlisted shares and qualifying cryptoassets) subject to a number of exemptions (see our blog post 'FCA Sets Out New Proposals to Restrict High-Risk Financial Promotions'). 

CP22/27 also includes draft non-Handbook guidance for approvals of financial promotions. 

We are unauthorised and currently rely on exemptions to make financial promotions. Will this change?

Potentially. As summarised in our article 'UK Financial Regulatory Update: Developments and Potential Impacts for Financial Services Firm', the Treasury consulted in early 2022 on updating the financial promotion exemptions for HNW individuals, sophisticated investors and self-certified sophisticated investors. In a nutshell, HMT proposed changing the criteria to take into account inflation and to further restrict their applicability, and to place a greater degree of responsibility on firms to ensure individuals meet the criteria rather than just relying on declarations.

There has been no recent progress on these proposals, however, the FCA indicated in CP22/27 that it supported restricting the use of financial promotion exemptions. 

Will the approval of financial promotions be subject to the FOS or FSCS jurisdiction?

No, there is no proposed extension to the jurisdiction of the FOS, nor will the approval of financial promotion be covered by the FSCS.

Will there be any reporting and / or notification requirements?

Yes, the FCA proposes to introduce fairly onerous reporting and notification requirements. Firms will be required to submit a notification to the FCA for every financial promotion of an unauthorised person that they approve. Furthermore, they will need to notify the FCA every time they approve an amendment to a financial promotion or withdraw a promotion. Firms will be required to submit these notifications via Connect within one week of the approval or withdrawal of the financial promotion.

Additionally, there will be periodic regulatory returns required in relation to the approval of financial promotions. 

If you have any questions or would like assistance with responding to the consultation or with the VOP process, we would be delighted to help.