Proposed changes to the financial promotion rules: unintended consequences

On 31 January 2024, the UK government will bring into force HM Treasury’s proposed reforms to the financial promotion rules.

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) contains restrictions on the issue of communications which amount to “promotions” of investments in securities. A financial promotion may be made only:

  • By a person authorised under the Financial Services and Markets Act 2000 (as amended) (FSMA) where the content has been approved by such an authorised person; or
  • In reliance on an exemption in the FPO.

Breach of the relevant rules (of FSMA and the FPO) is a criminal offence.

The approval of the promotion by an authorised person (as per the first bullet point above) is subject to its own restrictions: historically, any firm which was authorised and regulated by the FCA, or the PRA was deemed to be “authorised” for the purposes of approving financial promotions. From February 2024, firms wishing to be authorised to approve financial promotions must have applied for a variation of their regulatory permissions specifically to approve financial promotions. The application window for this variation of permission opened on 6 November 2023 and closes on 6 February 2024. Firms which have applied by the deadline can continue to approve financial promotions until their permission is granted. Firms which have not applied by the deadline can no longer approve financial promotions from the deadline.

In addition, HM Treasury proposed in November 2023 that the financial promotion exceptions for ‘high net worth individuals’ and ‘self-certified sophisticated investors’, among other aspects of the regime, were outdated and required changes. On 31 January 2024, the UK government will bring into force HM Treasury’s proposed reforms.

The exemptions for ‘high net worth individuals’ and ‘self-certified sophisticated investors’ are set out in Articles 48 and 50A, respectively of the FPO. Under the exemptions, financial promotions can be made to individuals who meet the criteria. HM Treasury have expressed concerns “about the misuse of the exemptions, including some businesses seeking to the use the exemptions to market products inappropriately to retail investors”. To prevent the abuse of these exemptions, the proposed reforms intend to tighten the criteria and increase the quantitative thresholds in line with inflation.

We summarise the key changes to these exemptions below.

High Net Worth Individuals (HNW)

On 31 January 2024, the UK government will raise the financial criteria to qualify for the exemption. The individual will now require:

  • an income of at least £170,000 (an increase from £100,000 previously) in the last financial year; or
  • net assets of at least £430,000 (an increase from £430,000 previously) throughout the last financial year.

Self-Certified Sophisticated Investors

The UK government will also raise one of the financial criteria to qualify for the exemption in Article 50A. To qualify, an individual will now be required to:

  • be a company director of a company with at least an annual turnover of £1.6 million, in the last 2 years.

The Government have removed the criteria for individuals having made an investment in an unlisted company, citing the rise of online investing as the reason for this criterion's now inappropriate nature.

The remaining criteria in Article 50A remain unchanged. In other words, the individual must also declare:

  • that they are a member of a network or syndicate of business angels, and have been so for at least the last six months prior to the date the declaration is made; and
  • that they are working or have worked in the two years prior, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises.

Other noteworthy changes include:

  • the form (FPO Schedule 5, Part 1) on which the HNW statement is made has been amended;
  • as well as ticking the box to state that income or assets exceed the minimum levels, the investor is required to provide an approximate income or asset value;
  • the form clarifies that income does not include one-off receipts; and
  • the form also clarifies that for “net” assets, the investor must deduct associated liabilities (e.g. if the investor owns a property with a market value of £5m, but that property has a mortgage of £3m, the property contributes £2m to the investor’s assets).

Employee Share Schemes

The incoming reforms will have an impact on companies who seek to issue financial instruments to potential investors, including companies who offer shares, options or other securities to consultants, advisors, non-executive directors and other non-employees.

Typically, companies seek to rely on the 'participation in employee share schemes' exemption in Article 60 FPO when offering shares or other securities to current or former employees pursuant to an employee share scheme. We continue to recommend that any shares, options or other securities that a company intends to issue to non-employees are done so separately to any employee share scheme (i.e. non-employees sign up to standalone agreements rather than being granted awards under a plan). This mitigates the risk of a plan used for employees losing its status as an employee share scheme for the purposes of Article 60.

Companies must rely upon an alternative exemption when issuing shares, options or other securities to non-employees – such as the HNW and self-certified sophisticated investor exemptions. Going forwards, companies will need to consider HM Treasury's reforms when seeking to rely on these exemptions and the changes are likely to restrict the number of individuals who meet the increased financial threshold criteria warranted by the reforms to Article 48 and 50A.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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