Overhaul of UK financial promotions exemption regime proposed

The Financial Promotions Order (FPO) is designed to help small and medium sized enterprises raise finance from sophisticated private investors without the cost of having to comply with the financial promotions regime.

However, according to a new consultation document, the regime has been affected by ‘economic, social and technological change’ since the exemptions were introduced more than 20 years ago, changing the context in which they should be viewed.

The government said these changes included the development of the online retail investment market, price inflation, and pensions freedoms, which have eroded the value of the HNWI exemption thresholds.

The consultation also highlighted that the exemptions have been misused, for example by promoting inappropriate products to ordinary retail investors.

The proposed reforms are aimed at ensuring that thresholds for exempt investors are calibrated to reflect investors’ experience or their ability to absorb losses; reducing the risk that the exemptions are used for promotions to investors who do not meet the conditions; and that where exemptions are used, investors understand the regulatory protections they are losing and are able to take responsibility for their investment decisions.

The government has proposed five possible updates to the exemptions: increasing the financial thresholds for HNWIs; amending the criteria for self-certified sophisticated investors; placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed HNW or sophisticated; updating the HNWI and self-certified sophisticated investor statements; or updating the name of the HNWI exemption.

Financial regulation expert Elizabeth Budd of Pinsent Masons said the overhaul of the FPO exemptions was overdue.

“Over the last couple of decades, as the consultation makes clear, there has been a significant shift in wealth, there have been pension freedoms, and the way in which people invest has changed. The exemptions and their operation do not adequately address the potential risks of investing in unlisted securities on the back of a promotion which has not been approved by an authorised person,” Budd said.

“The operation of the exemptions is in fact quite complex, so it is not entirely surprising that businesses get it wrong. The warnings, statements and certificates are legalistic and do not fit with a more modern way of drafting legal and compliance documentation,” Budd said.

“Within the authorised arena there are the added regimes of the non-mainstream pooled investments and speculative illiquid securities, but outside the authorised arena these three exemptions are all that is relied on. Changing the threshold of the HNWI is long overdue but there needs to be a careful balance of investor protection against encouraging people to invest and take an appropriate level of risk,” Budd said.

The consultation is seeking views on the level to which HNWI thresholds could be raised, with an option of raising the threshold in line with inflation since 2001, or setting it so it captures the top 1% of earners as it originally did. The government said the current thresholds, which stipulate that someone is a HNWI if they earn £100,000 or more or have net assets of at least £250,000, now apply to those in the top 3% of earners.

It said the threshold for self-certification as a sophisticated investor could also be increased in line with inflation. Meanwhile the criteria for self-certification of having made more than one investment in an unlisted company in the previous two years is likely to be removed, with the consultation noting it is much easier for individuals to make such investments now than when the criterion was added in 2005.

The FPO exemptions consultation is running parallel to other government and Financial Conduct Authority (FCA) initiatives looking at financial promotions rules, including a proposal to establish a gateway through which an authorised firm must pass before it can approve financial promotions by unauthorised firms.

The FCA has also been undertaking behavioural testing on how best to influence consumer behaviour to make effective investment decisions, with results due in early 2022.

The consultation is open until 9 March 2022.