The regulatory gateway for firms who approve financial promotions

Key message

Existing authorised firms who want to be able to approve financial promotions for unauthorised firms after 7 February 2024 must make sure they have applied to the FCA before then for permission to do so. The FCA will start receiving applications from 6 November 2023.

Background 

As many of you reading this will know, it is prohibited (very broadly speaking) for anyone to invite or encourage someone to invest money or handle claims in the course of business – i.e., to communicate a financial promotion - unless the promotion has been made or approved by an authorised person or is exempt. This prohibition (and the rules associated with it) are informally referred to in the U.K. as the financial promotion regime.

In recent years, the FCA has found that the regime needs more protections to make sure that approval by an authorised person really does protect consumers from bad or potentially harmful financial promotions. This is because some firms haven’t done enough due diligence to make sure they meet FCA requirements, or they’ve approved promotions for products they do not know enough about.

After a consultation in July 2020 and a response to that consultation in June 2021, HM Treasury has confirmed changes to the way financial promotions are approved by creating a so-called ‘regulatory gateway’ for firms who approve financial promotions. The Financial Services and Markets Act 2023 (FSMA 2023), which received Royal Assent on 29 June 2023, made the necessary changes to the existing law in the Financial Services and Markets Act 2000 (FSMA). Finally, in September 2023 the FCA published PS23/13, which responds to the feedback on their December 2022 Consultation Paper (CP22/27) and sets out the near-final rules for gateway.

As things currently stand

Today, the financial promotion regime doesn’t impose any restrictions on which authorised person can approve which type of promotion. Instead, any authorised firm can do so and, subject to complying with high level obligations under the FCA’s conduct of business rules, it’s up to each firm to decide how much of an analysis or review is needed to make sure that a financial promotion complies with the FCA's rules. To the FCA, this means that:

• approving firms lack expertise,
• approving firms don’t do enough due diligence, and
• the FCA struggles to exercise appropriate regulatory oversight.

Until now, in two Dear CEO letters in January and April 2019, the FCA has just reminded firms that they must follow the rules for financial promotions, which include being fair, clear and not misleading.

The new ‘Financial Promotion Requirement’ and regulatory gateway

To address these issues, the FSMA amendments impose a new prohibition called the ‘Financial Promotion Requirement’ on all existing and newly authorised firms, restricting them from approving financial promotions. The Financial Promotion Requirement takes effect on 7 February 2024 (subject to the transitional period described below).  

From 6 November 2023 to 6 February 2024, existing authorised firms who want to approve financial promotions for unauthorised firms must apply for permission to do so by submitting a variation of permission application. During this time, they can still  approve promotions. New applicants for authorisation who want to approve financial promotions for unauthorised firms must apply for such permission as part of their application.

Existing authorised firms who have applied for permission within the initial application window will enter a transitional period starting on 7 February 2024 and ending when the FCA has decided the particular firm’s application. During the transitional period, such firms can still approve promotions for unauthorised persons. If their application is successful, they can continue to do so; if unsuccessful, they will have to stop. (The statutory deadline under FSMA for determining applications is 6 months for a complete application and 12 months for an incomplete application.)

The process of applying to the FCA for approval referred to above is called the new regulatory ‘gateway’ or ‘s21 gateway’ (a reference to the specific section of FSMA containing the financial promotion restriction).

Exemptions 

Exemptions from the gateway requirement (i.e., instances when a firm doesn’t need the FCA’s permission to approve a promotion) are as follows:

• firms approving the financial promotions of an unauthorised person within the same corporate group,
• the approval of authorised firms' own promotions for onward communication by an unauthorised firm, and
• principals approving financial promotions for their appointed representatives in relation to regulated activities, for which the principal has agreed to accept responsibility.

Application process

A firm applying to approve financial promotions will need to state or demonstrate the following (among other things):

• the kinds of products for which it wants to be able to approve financial promotions;
• that it has systems in place to keep adequate records of the financial promotions that the firm approves;
• how it will ensure the commercial viability of the propositions described in the promotion it is asked to approve;
• that is has in place adequate systems, controls, and processes to make sure that the promotions which it approves comply with FCA rules;
• that it has suitable policies and procedures for monitoring promotions and, where appropriate, withdrawing approval or requiring a promotion be amended; and
• that it has thought about how many promotions it intends to approve and the revenue it intends to generate from this.

The immediate point for firms to consider is that existing authorised firms who wish to continue approving financial promotions for unauthorised firms after 7 February 2024 must make sure they have applied to the FCA before then for permission to do so. Firms seeking authorisation for the first time after 7 February 2024 will have to consider that the statutory deadline for determining applications is 6 and 12 months for complete and incomplete applications respectively.