Which exemptions are affected?
Among the various exemptions available to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) (FPO) are the exemptions for High Net Worth and Self-certified Sophisticated Investors, which are set out in Articles 48 and 50A of the FPO. These particular exemptions operate as an important route for unlisted companies to raise capital in the UK.
What is the effect of the exemptions?
Where an exemption applies, it takes a promotion outside of the financial promotion prohibition (in section 21 of the Financial Services and Markets Act 2000 (as amended) (FSMA)), enabling unauthorised individuals or businesses to communicate financial promotions without the need for:
- the individual/business to be FCA/PRA authorised;
- the individual/business having to secure approval of its promotions by an authorised firm; or
- the promotion itself to comply with applicable FCA rules.
Relying upon an exemption also means that an investor to whom a communication is made does not benefit from certain regulatory protections.
Why are the exemptions being changed?
HM Treasury outlined its rationale for the changes in a consultation that ran between December 2021 and March 2022. The exemptions were first introduced in 2001 and were last reviewed in 2005. Accordingly, given the passage of time, the exemptions need to be revisited to ensure they reflect:
- economic changes, such as price inflation;
- social changes, such as the pension freedoms introduced from 2015; and
- technological changes, such as the development of the online investment market.
Another driver for change is evidence that the exemptions may be misused. For example, as part of the investigation into the failure of London Capital & Finance, the Financial Conduct Authority (FCA) highlighted instances of firms encouraging consumers to self-certify as ‘high net worth’ or ‘sophisticated’ in order to bring them within one of the exemptions from section 21 FSMA.
Where are the changes and where are they set out?
A draft of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023 (Order) was laid before Parliament on 6 November 2023. As outlined in the accompanying explanatory memorandum, the draft Order makes the following changes:
High Net Worth exemption (Article 48, FPO)
The draft Order amends the name of the exemption to remove the word 'Certified'. This word has effectively been an anachronism for many years as no third party certification takes place for this exemption.
The financial thresholds for availability of the exemption have been revised upwards to account for inflation, and the relevant investor statement has been amended to clarify that an individual should not count within the thresholds any one-off pension withdrawals under the pension freedoms. Individuals completing the High Net Worth Individual Investor statement will need to engage more to specify by means of check-boxes how they meet the thresholds and will also need to acknowledge the regulatory protections they will lose.
The changes are summarised below. A new template for the investor statement is set out in Schedule 1 of the draft Order.
Current thresholds
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From 31 January 2024
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Income of at least £100,000 in the last financial year.
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Threshold adjusted to account for inflation
Income of at least £170,000 in the last financial year.
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Net assets of at least £250,000 throughout the last financial year.
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Threshold adjusted to account for inflation
Net assets of at least £430,000 throughout the last financial year.
Net assets should not include pension withdrawals.
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Sophisticated investors (Article 5OA, FPO)
The criterion for individuals who have made an investment in an unlisted company in the previous two years has been removed, as this is no longer a reliable indicator of an investor's level of sophistication. The turnover level for the company director criterion has also been adjusted upward with inflation.
The changes are summarised below. A new template for the Self-certified Sophisticated Investor statement is set out in Schedule 2 of the draft Order. As with the high net worth exemption, individuals completing the investor statement will need to engage more, provide more information to support how the criteria apply to them and acknowledge the regulatory protections they will lose.
Current eligibility criteria
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From 31 January 2024
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Has been a member of a network of business angels for at least the preceding 6 months;
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No change.
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Has made more than one investment in an unlisted company in the preceding 2 years;
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This criterion removed.
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Is working, or has worked in the preceding 2 years, in a professional capacity in private equity or finance; or
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No change.
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Is, or has been in the preceding 2 years, a director of a company with an annual turnover of at least £1 million.
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Adjusted to account for inflation.
Annal turnover must be at least £1.6 million.
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Collective Investment Schemes
The draft Order also makes equivalent changes to the exemptions available for promotions of collective investment schemes in Articles 21 (certified high net worth individual) and 23A (self-certified sophisticated investor) of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (PCIS). The templates for these PCIS exemptions are set out in Schedules 3 and 4 of the draft Order.
Where these exemptions apply, it takes a promotion outside the restriction against communicating an invitation or inducement to participate in a collective investment scheme (in section 238 FSMA).
What will be the impact for individuals?
Individuals completing the applicable investor statement will, through the redesign of the statements, have a chance to 'pause for thought' about potential loss of regulatory protection, and to consider and be able to evidence how the criteria apply to them. HM Treasury considers this will mitigate the risk that inappropriate products are marketed to investors that do not fall within scope of the exemptions.
What will firms need to do to prepare?
Firms will need to make amendments to their internal processes for exempt communications.
- From 31 January 2024, where a firm seeks to rely on the exemptions for new promotions, the firm must ensure the newly designed investor statements are completed.
- Firms will also need to disclose more information in their communications to enable investors to undertake basic due diligence – this includes company address, contact information, and the company's registration details (either at Companies House or an equivalent registration abroad).
Where financial promotions were made before 31 January 2024, follow-up financial promotions relating to the same matter can be made within 12 months of the original communication, under Article 14 of the FPO.
What are the consequences of non-compliance?
Where a communication is made without the benefit of the exemption, this could amount to an offence under FSMA, with the unauthorised person liable to a fine or up to two years' imprisonment, or both. Any agreements entered into as a result of the communication may be unenforceable, and the customer may be entitled to recover any money paid or other property transferred under the agreement and to compensation for any loss.
Authors: Simon Crown, Joseph Paddon and Sara Evans.
