The UK government through HM Treasury ran a consultation between December 2021 and March 2022 on proposed changes to the exemptions to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), in particular for high net worth individuals and self-certified sophisticated investors. A “financial promotion” is any communication of an invitation or inducement which, if acted upon, would lead a person to carry on a controlled activity in relation to a controlled investment or to acquire, dispose of or convert rights under a controlled investment. Section 21 of the Financial Services and Markets Act 2000 (FSMA) sets out the restrictions for these financial promotions. HM Treasury published its consultation response on the exemptions in November 2023. Below are the following key changes in respect of:
- Certified high net worth individuals (Article 48 of the FPO); and
- Self-certified sophisticated investors (Article 50A of the FPO).
Amended high net worth exemption criteria
HM Treasury has increased the current financial thresholds to meet the high net worth criteria for both income and assets, following responses that flagged the link between inflation and requirements to qualify for the exemption. The new financial thresholds are set out below:
- income of at least £170,000 (from £100,000) in the last financial year; or
- net assets of at least £430,000 (from £250,000) throughout the last financial year.
The respondents to the consultation had put forward for the increase to capture the top 1% of the population and to correlate the financial loss with those who could bear such loss, excluding pensioners who may be using their pension to count towards the net assets calculation. However, HM Treasury has chosen only to go with its baseline proposal of increasing the figures in line with inflation, rather than increase them substantially. HM Treasury has also confirmed that the word “certified” is being removed from the title of the exemption, as investors have not needed to be certified in order to use this exemption since 2005.
Amended Self-Certified Sophisticated Investor exemption criteria
HM Treasury has amended the threshold so that an individual who has been a director of a company with an annual turnover of at least £1.6 million in the last two years (up from £1 million) will qualify for this exemption. This figure has also been raised in line with inflation, although HM Treasury highlighted that some respondents considered the existing threshold was adequate, whilst others believed it should be removed entirely. HM Treasury is removing the exemption for individuals who have made an investment in an unlisted company in the previous two years. The consultation found that this is no longer an indicator of sophistication, given the ease with which individuals may now invest in unlisted companies due to the rise in online investment platforms. The other two criteria under which an individual can qualify as a self-certified sophisticated investor have been left unchanged.
Business responsibility for meeting the criteria
HM Treasury has decided not to place more responsibility on businesses making promotions to ensure that individuals meet the relevant criteria. The consultation reports that a large majority of respondents disagreed with its proposal to place more responsibility on businesses, highlighting significant practical issues and suggesting this would impose a barrier to investors reviewing numerous investment opportunities. Feedback also suggested that placing greater responsibility on businesses would make it more difficult for businesses relying on the overseas persons exemption, as they would find it hard to demonstrate a legitimate approach if they need to verify that an individual meets the exemption criteria.
These responses are in contrast to the FCA’s views which in the FCA’s last perimeter report stated:
“There should be a greater responsibility on firms to verify individuals meet the criteria to be HNW or sophisticated. Leaving this aspect of the legislation unchanged would undermine other measures to strengthen the financial promotions regime, and continue to lead to significant consumer harm that we are unable to reduce. We are not aware of any other jurisdiction that allows firms to use exemptions purely based on investors’ self-certification.”
Therefore, HM Treasury’s decision to keep the current responsibility is not in line with the FCA’s outlook on this issue. HM Treasury notes in its response that the FCA also has exemptions that mirror the above FPO exemptions within its rules for authorised firms wishing to market high-risk investments. It will be interesting to see whether and how the FCA chooses to amend these exemptions in light of the outcome of this consultation.
Investor statements, greater engagement and requirement to include contact information
The format of the investor statements has been changed so that information on the conditions to be satisfied is made more prominent by being at the top of the statements. Also, it will be made clearer to investors that financial promotions made under these exemptions may not follow FCA rules nor be accompanied by any protections, such as from the Financial Ombudsman Service or the Financial Services Compensation Scheme.
We have set out the revised draft investor statements at the end of this article, but HM Treasury will confirm whether any further changes will be made before the new regime comes into force on 31 January 2024.
HM Treasury has also introduced a new requirement within the exemptions that the person or business making the communication must provide their details in any communications made using the exemptions. These details include company address, contact information, and the company’s registration details. This aims to help prospective investors undertake basic due diligence on the persons marketing investments. It could also assist the FCA in investigating potential non-compliance with the exemptions. It is unclear in what form this information should be provided and so at this stage we have included a placeholder for this information in the relevant investor statements below.
Following the implementation of the reforms set out in consultation response, HM Treasury notes that the FCA may decide to consult on updating their exemptions to reflect some or all of the changes being made to the FPO exemptions.
Timeline
HM Treasury’s changes will be implemented via secondary legislation, which was laid before Parliament on 6 November 2023. HM Treasury intends to bring the changes into effect on 31 January 2024 (subject to Parliamentary approval of the legislation). New promotions made from this date will need to comply with the updated exemptions, as HM Treasury does not consider it necessary to introduce any transitional measures.
Consequently, businesses that rely on these exemptions will need to review their policies and procedures in relation to financial promotions and ensure that they are prepared to comply with the amended exemptions.
Article 14 of the FPO enables subsequent follow-up financial promotions relating to the same matter within 12 months of the recipient receiving the first communication, where relevant requirements are met. Therefore, HM Treasury has confirmed that where a business has made a financial promotion to an individual before 31 January 2024 in compliance with existing exemptions, that business will continue to be able to engage with the relevant individual and will not be required to request an updated investor statement if follow-up financial promotions relating to the same matter are within 12 months of the first communication.
This article first appeared on Lexology. You can find the original version here.