Reforms to the financial promotions exemptions

What has happened?

The UK government is consulting on proposals to amend the financial promotions exemptions available for high-net-worth individuals and sophisticated investors. These exemptions are contained in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

The consultation ran until 9 March 2022.

What are the key points of the consultation?

The available exemptions enable unauthorised individuals or businesses to communicate financial promotions without requiring the approval of an authorised firm.

The consultation considered three specific exemptions, namely those for;

• Certified high-net-worth individuals (under Article 48 of the Financial Promotion Order),
• Sophisticated investors (under Article 50), and
• Self-certified sophisticated investors (under Article 50A)

As part of the consultation, the government sought to outline five proposals for how the exemptions could be updated. These are:

1. Increasing the financial thresholds for high-net-worth individuals,
2. Amending the criteria for self-certified sophisticated investors,
3. Placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated,
4. Updating the high net worth individual and self-certified sophisticated investor statements, and
5. Updating the name of the high net worth individual exemption.

These proposals are covered individually below.

Increasing the financial thresholds for high-net-worth individuals

High net worth individuals are defined as individuals who certify that they have earned at least £100,000 in the previous year or hold net assets of at least £250,000. The government considers that these thresholds are now too low and should be updated, although no firm figures have been decided on.

Amending the criteria for self-certified sophisticated investors

One of the criteria to be classified as a self-certified sophisticated investor is to have made more than one investment in an unlisted company in the previous two years. The rise in online investing means that it is much easier for individuals to invest in unlisted companies than it was in 2005, when the self-certified sophisticated investor exemption was introduced.

The government believes therefore that this is no longer an indicator of investor sophistication, and that this element should be removed from the self-certified sophisticated investor definition. The government is not currently proposing a replacement for this test, but it welcomed views from stakeholders on alternative tests that could be introduced to demonstrate appropriate levels of sophistication.

Placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated

Firms that make promotions under the high net worth individual and self-certified sophisticated investor exemptions should believe on reasonable grounds that the individual they are communicating to has signed the high net worth individual or self-certified sophisticated investor statement. There is, however, no obligation on the firm to check that the individual actually meets the criteria. In light of evidence that some investors are being classified as high net worth or sophisticated when they do not meet the conditions, the government believes that there should be a greater responsibility placed on firms to check that the criteria are met.

The government is proposing that the emphasis of the ‘reasonable belief’ be shifted so firms communicating the financial promotion must have a reasonable belief that an individual meets the criteria, not simply that they have signed a relevant statement. It would be for the firm to determine how it comes to this conclusion, and to document this information accordingly.

The government is also proposing that firms should be required to provide details about themselves in any communications made using the exemptions. This would include the firm’s address, the contact details of the firm, and if appropriate, the firm’s Companies House number (or international equivalent). This information would help consumers undertake basic due diligence on the persons marketing investments and assist the FCA in investigating potential non-compliance with the exemption.

Updating the high net worth individual and self-certified sophisticated investor statements

The government proposes making three substantive changes to investor statements to remedy these problems;

• Updating the format. In the current investor statements, the conditions to be considered a high net worth or sophisticated investor are contained at the bottom of the statement following a large block of text. The government thinks that more can be done to make this information more prominent, for example, by breaking up the text or by reordering it, and making clearer that investors who do not meet the criteria should not proceed any further.
  
  
• Simplifying language. Where possible, the government is proposing that the language in the investor statement is simplified, for example, with fewer references to other pieces of financial services legislation. It is hoped that this would more effectively hold the attention of investors, making the implications of losing protections afforded by the financial promotions regime clearer
  
  
• Requiring greater investor engagement. In the current investor statements, investors only have to sign the bottom of the statement declaring they are high net worth or sophisticated, without specifying which of the relevant criteria they meet. The government is proposing that in the updated statement the investor would be required to select which specific criteria they meet in order to be classified as high net worth or sophisticated, and to set out how they meet these criteria

Updating the name of the high net worth individual exemption

In the case of the certified high net worth individual exemption, updates made to the Financial Promotion Order in 2005 mean that investors no longer have to be certified by a third party. Given this, the government proposes to amend the name of the exemption to the ‘high net worth individual’ exemption, removing “certified” from the title.

How can we help you?

Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as and when, our team of specialists can serve as your right hand in meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your financial promotions compliance arrangements, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.