Those operating in the funds sector will be familiar with the general rule that an individual or a business cannot communicate a financial promotion unless:-
- it is made by an authorised person;
- it is approved by an authorised person; or
- it otherwise meets the conditions of an exemption within the Financial Services and Markets Act 2000) Financial Promotion) Order 2005 (FPO).
On 15 December 2021, HM Treasury published a consultation on proposed changes to the financial promotion exemptions regime. The consultation focuses on the following three exemptions:-
- Certified high net worth individuals (article 48 of the FPO) - this exemption applies where the investor has certified that they have an income of £100,000 or more in the last year, or net assets of £250,000 or more. It can only be used to market investments in unlisted companies.
- Sophisticated investors (article 50) - this exemption applies to investors who (i) have a certificate signed in the preceding three years by an authorised person stating that the investor is sufficiently knowledgeable to understand the risks associated with the relevant type of investment; and (ii) they themselves have signed a certificate in the preceding 12 months stating that they qualify for the exemption and understand the implications. There are no limits to the type of investment that can be marketed under this exemption.
- Self-certified sophisticated investors (article 50A of the FPO) - this applies if the investor meets one of the following conditions:-
- they are a member of a network or syndicate of business angels (and have been for at least six months prior);
- they have made more than one investment in an unlisted company in the previous two years;
- they are working or have worked in the previous two years in a professional capacity in the private equity sector in the provision of finance for SMEs; or
- they are currently or have been in the previous two years a director of a company with an annual turnover of at least £1 million.
This exemption can only be used to market investments in unlisted companies.
What’s prompted the consultation and what are the proposals?
Various factors have brought about this consultation, not least that the exemptions were first introduced over 20 years ago and that there have been huge economic, social and technological strides since then which, in the Government’s opinion, means that many more additional consumers now fall within the definitions for high net worth individuals and sophisticated investors (because of e.g. inflation, greater pension freedoms and the introduction of online investing). There is also a recognition that the exemptions have been open to abuse (London Capital and Finance is singled out for mention here).
The Government’s view is that the exemptions should remain as they play an important part in raising investment, but that:-
- the financial thresholds for high net worth individuals should be increased - the consultation paper seeks views on what the appropriate thresholds should be (as a minimum the Government suggests a net income of £150,000 and a net asset threshold to £385,000 but is seeking views on whether these thresholds should be higher);
- the criteria for self-certified sophisticated investors should be amended - the Government no longer believes that making one investment in the preceding two years is a suitable indictor of ‘investor sophistication’ and proposes this be removed. It also proposes that the company turnover threshold should be increased to £1.4 million;
- there should be a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated - currently, the requirement is that a firm making a promotion ‘believes on reasonable grounds’ that the individual has signed the relevant certificate but there is no obligation on the firm to check that the individual actually meets that criteria. The Government proposes to change the requirement so that the firm must have a reasonable belief that the individual meets the requirements (not just have a reasonable belief that they have signed a certificate). The Government also proposes that a firm be required to provide details about themselves in any communication made using the exemptions such as their address and contact details;
- the high net worth individual and self-certified sophisticated investor statements should be updated by (i) changing the format so that the information is broken up rather than appearing in a large block of text; (ii) simplifying the language e.g. so that there are fewer references to legislation; and (iii) requiring greater investor engagement i.e. requiring the investor to indicate which specific criteria they meet and to set out how they so meet the criteria; and
- the name of the high net worth individual exemption should be updated to remove reference to ‘certified’ (because they are no longer certified by a third party).
There are a total of 21 questions which the Government is looking for responses on. The consultation period closes on 9 March 2022.
Obviously, if implemented, these changes will have an effect on (i) the content of marketing and promotional material; and (ii) the types of individuals to whom they can be promoted, so these proposals will be of importance to fund managers and their advisors and administrators.
Other points to bear in mind
It’s worth noting that while the consultation paper focuses on the FPO, the Government has indicated they intend that any reform will also apply to the exemptions under the Promotion of Collective Investment Schemes (Exemptions) Order 2001.
Note too that the consultation paper should be read alongside/in light of other Government proposals to (i) strengthen financial promotion rules for ‘high risk investments’; and (ii) introduce a regulatory ‘gateway’ for firms which approve financial promotions.
A link to the consultation paper can be found here