Financial promotion exemptions: Government U-turn

The background: A reminder on financial promotion exemptions

HM Treasury consulted just over two years ago on proposed changes to the financial promotion exemptions in the Financial Promotion Order for high net worth individuals and sophisticated investors. The final changes were confirmed in November 2023 and started to apply from 31 January 2024.

The exemptions disapply the effect of the financial promotion restriction in section 21 of FSMA 2000 that an unauthorised person must have its financial promotions approved by an authorised person before they are communicated. The chief aim is to allow SMEs to raise finance from so-called ‘business angels’, without the cost of having to comply with the financial promotion regime.

The consultation came about as a result of: various economic, social and technological changes; instances of misuse; and a lack of engagement with the exemption requirements among investors. The reforms were part of a wider package of consumer protection initiatives.

The changes included: tightening the eligibility criteria; strengthening investor statements; and mandatory information requirements.

What’s happening now?

A brief paragraph at page 79 of 94 in the Chancellor’s Spring Budget 2024 confirms that the Government will: legislate to reinstate the previous eligibility criteria to qualify as a high net worth or sophisticated investor; and carry out further work to review the scope of the financial promotion exemptions.

The relevant legislation has already been laid before Parliament and comes into force on 27 March 2024.

What are the changes?

The legislation amends the criteria to be eligible for the exemptions, while retaining the updated format of the investor statements introduced in January 2024. It:

• Reduces the financial thresholds to be eligible for the high net worth individual exemption to income of at least £100,000 in the last financial year; or net assets of at least £250,000 throughout the last financial year.
• Amends the criteria to be eligible for the self-certified sophisticated investor exemption by: reinstating the criterion of having made two or more investments in an unlisted company in the previous two years; and reducing the company turnover required to satisfy the “company director” criterion to £1 million.
• Provides that investor statements complying with the previous changes remain valid up to and including 30 January 2025.

The updated investor statements are set out in various Schedules.

The legislation also amends the relevant exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.

Why the U-turn?

The Government explains that significant concerns were raised by stakeholders about potential unintended impacts of the earlier changes to the exemptions. Specifically, the technology, angel investing, and theatre sectors raised new concerns that the changes to the eligibility criteria could affect the ability of start-up businesses to obtain investment, and the ability to finance theatre productions through small-scale investors.

An open letter to the Chancellor, as part of a campaign led by the Startup Coalition, set out the following concerns: the investment market has changed since the reforms were first consulted on; the startup ecosystem will be hit hard; female and underrepresented founders will be hit hardest; and angel investing risks becoming an elite-only activity, undoing huge amounts of good work to address this gap.

In a statement, the Financial Conduct Authority said it will continue to work with the Government on how the financial promotions regime can be strengthened to avoid consumer harm, while ensuring access to sustainable sources of investment for growing businesses. The FCA reiterated that the UK’s definition of a high net worth investor is an international outlier, with a far lower threshold than comparable jurisdictions. It has also previously suggested that the criteria for investors to be classified as ‘sophisticated’ should be tightened.

Financial promotion exemptions: How we can support you

Please contact Andrew if you: have queries about any of the points raised in this briefing; need assistance with preparing for the upcoming changes or advice on how they may affect you; or have concerns over any other regulatory or compliance issue.