FCA Announces New Gateway for Approving Financial Promotions

In line with its three year strategy to set higher standards across the industry, the FCA is introducing a new gateway which will lead to stricter rules for approving and policing financial promotions. This comes just a year after the FCA introduced stricter rules on the advertisement of high-risk investments.

The issuing of financial promotions is a key part of many firms’ business practices, and are commonly used as a means to attract new customers.For the purposes of the FCA, a financial promotion is defined as an “invitation or inducement to engage in investment activity or to engage in claims management activity that is communicated in the course of business”. In practice, these can include marketing tools such as radio and television adverts, website articles, newspaper and magazine features, and even face-to-face (or, “real time”) communications. They can cover a range of different financial services, including insurance policies, pre-paid funeral plans, pensions, investments, mortgages, motor finance arrangements, and others.S.21 of the Financial Services and Markets Act 2000 contains a standard restriction on the issuing of financial promotions. This dictates that financial promotions can only be communicated or issued – when done by way of business – by either an FCA-authorised firm, or alternatively by an unauthorised firm but which has had the promotion approved by an authorised firm, or where a specific exemption applies.

In practice, it is common for an authorised firm (as “Principal”) to have an Appointed Representative acting on its behalf as a customer-facing intermediary, which may issue promotions on the Principal firm’s behalf. Under the current rules, the Principal is able to approve promotions which it’s Appointed Representative may want to issue, without the need for specific authorisation from the FCA (although the Principal must ensure that it is satisfied the promotion will not itself breach any regulatory requirements).

The current arrangements offer a practical means for firms – both authorised and unauthorised - to issue financial promotions as part of the running of their business.However, the FCA’s new Policy Statement will result in a change to this process and introduce a new regulatory gateway, whereby all authorised firms that want to be able to approve financial promotions for unauthorised firms will now need to apply the FCA for permission to do so.

This will allow the FCA to assess firms’ suitability to approve financial promotions, monitor the approvals market more effectively, and to support the approach of the Consumer Duty by ensuring financial advertisements give consumers’ sufficient understanding of the products or services they are purchasing and empowering them to take responsibility for their decisions.

What are the problems with the current regime which the FCA identified

The new rules appear to serve as an informal follow-on from the introduction of the new Consumer Duty regime, which requires firms to act to deliver good outcomes for retail customers, with a focus on consumer understanding. Financial promotions are often the starting point for many consumers in deciding to engage with a financial service, and so consumer understanding can be strongly influenced at those stages.

In its draft guidance, the FCA expressed concern about the number of non-compliant promotions being approved and communicated by unauthorised firms to retail consumers. This results in consumers purchasing financial products which do not suit their risk level. The new rules will mean that firms need to give greater thought to the question of financial promotions and their policies in respect of preparing, reviewing, and authorising them  - both by themselves and by other firms. The FCA has stated that 'By introducing these new checks, we will ensure people approving adverts have the right skills and understanding they need to do so.’ It goes on to say that 'Firms need to make sure people are equipped with the right information at the right time, so they can make properly informed decisions.’

The importance of consumers making informed investments which suit their risk level has become increasingly important due to inflation and the cost-of-living crisis. Indeed, on the introduction of the gateway Sarah Pritchard, the Executive Director of Markets at the FCA, said “The cost of living is still rising, and consumers are having to make difficult decisions about their finances…Consumers are often targeted with adverts that are unclear, unfair or misleading, and this can lead consumers to access products that do not suit their circumstances”

The new rules also appear to be timed to coincide with cryptoassets and services being brought within scope of the financial promotions regime in October 2023. The new regulatory gateway will allow the FCA greater ability to monitor and review how firms are approaching promotions in this emerging sector.

Who will need to apply

The new rules formally come into force on 7 February 2024.

Any authorised persons who currently approve financial promotions for unauthorised persons and who wish to continue to do so, will shortly need to apply to the FCA for permission to issue promotions (a “s.21 Approver”).

There are, however, exemptions to when authorised persons will need permission, which came into force on 27 September 2023. These are intended to be:

1. An authorised person’s own promotions.
2. Financial promotions prepared by unauthorised persons in the same corporate group.
3. Financial promotions prepared by an Appointed Representative where the promotion relates to regulated activity for which the authorised person has accepted responsibility.

How to apply to become a s.21 approver?

The FCA has announced a three-month window whereby firms will be able to apply to become a s.21 approver whilst still being able to continue to approve promotions in the meantime.

The initial application period opens on 6 November 2023, and runs through to 6 February 2024. The new regime will be implemented the following day. Firms who have applied for permission within the application period can continue to approve financial promotions until the FCA has determined their application. If a firm does not apply during this initial application period, it will still be entitled to apply for permissions following 6 February 2024 but will not be permitted to approve financial promotions until the FCA has approved its application.

The FCA’s approach to assessing applications will be framed by its operational objectives – particularly, the objective of securing protection for consumers. Applicants will also be assessed by reference to the rules that apply to the type of promotions they wish to approve.

Further Reporting Requirements

Along with the introduction of the new gateway, the FCA has also introduced further reporting requirements for firms which approve financial promotions for unauthorised persons.

Firms are required to notify the FCA on approval of a financial promotion, if the product to which the financial promotion relates is subject to a retail mass-marketing ban, or is a qualifying cryptoasset investment. This reflects the FCAs focus on promotions of high-risk investments specifically targeted at retail investors, and the increasing regulation of cryptoassets. S. 21 approvers are also required to notify the FCA if they approve amendments to a promotion or withdraw an approval, if this is due to a ‘notifiable concern’.S.21 Approvers will also be subject to a bi-annual reporting requirement. This requires firms to submit data twice every financial year about the approvals they are signing off and other information which the FCA requires to effectively monitor the approvals market.

As with the new gateway regime, these reporting requirements will take effect from 7 February 2024, so prospective applicants will need to ensure that they are ready to comply from this date. Some respondents to the consultation paper indicated that they would need to implement software solutions to comply with the FCAs proposed reporting requirements. Therefore, prospective applicants should consider whether the current software they have will enable them to keep up with the additional administrative burdens.

What does this mean for firms?

The regulatory gateway will likely have a significant initial impact on firms and their approaches towards financial promotions. Firms have a relatively short timeframe to apply for permissions, and so it will be important for firms to act promptly to familiarise themselves with the new rules and determine whether – based on the nature of their businesses and what promotions they are approving and for whom – an application for authorisation is required. In such cases, firms should take steps to ensure they are filing their applications within the specified window the FCA has set out, in order to minimise potential business disruption and ensure promotions can continue to be approved “as normal” in the run up to February 2024.

Once the gateway comes into effect, authorised firms will need to undertake enhanced due diligence on each promotion and comply with ongoing reporting requirements. Firms will therefore need to ensure their compliance teams and senior managers are familiar with the new requirements and are “ready to go” come the implementation date.

On a wider-market level, the new rules may result in some firms reviewing their existing arrangements in terms of promotions and, in some cases, potentially refining or limiting the types of promotions they approve and/or limiting the numbers of firms for which they issue approvals, potentially in order to try and fall within an exemption so that a formal application to the FCA is not required. As a result, unauthorised firms may struggle to find an appropriate approver for their financial promotions, and may see higher costs and/or fees being imposed, as the additional costs to authorised firms as a result of this new regime may be passed onto unauthorised firms.

Despite this, the changes to the approval of regulatory promotions should have a positive effect for consumers, by reducing the number of misleading financial promotions and to ensure greater oversight by the FCA of firms, which may serve to bolster the effect of the Consumer Duty.

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If you have any queries in relation to financial promotions, the FCA’s new gateway and reporting requirements, or any other matters arising from the above, do not hesitate to contact our Financial Services Regulation Team to discuss what support we can provide.