The New Financial Promotions Approval Gateway: What You Need to Know

We explain the new gateway that is designed for authorised firms to interact with, where they can approve financial promotions.

The Financial Services and Markets Act 2023 (FSMA 2023) is a significant update in the UK's financial regulatory framework since Brexit. Enacted on 29 June 2023, it aims to enhance both the competitiveness and innovation of financial firms. With it brought a new gateway that is designed for authorised firms to interact with, where they can approve financial promotions.

Key Highlights

The update introduces reforms across various sectors, including the regulation of cryptoassets and stablecoins for payments. This shifts the UK towards a more UK-centric model, moving away from EU-derived regulations. 

Key innovations include the Designated Activities Regime (DAR) and adjustments to incorporate activities formerly under EU oversight, enhancing HM Treasury and regulators' powers for UK-specific and international standards alignment.

A notable reform is a new gateway for approving financial promotions, ensuring only qualified firms can endorse promotions for non-regulated entities. This is designed to boost consumer protection and market integrity. 

FSMA 2023 also emphasises regulatory accountability and transparency, mandating rule reviews and public engagement. It introduces a secondary objective for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to promote the UK's international competitiveness, alongside ensuring market stability and consumer protection.

Overall, FSMA 2023 aims to establish a flexible, competitive regulatory framework that supports the UK's global financial leadership.

Background and Rationale for the New Gateway 

Previously, the UK's financial promotion regulations were outlined by the Financial Services and Markets Act 2000 (FSMA 2000) and its amendments. This required firms to adhere to standards of fairness, clarity, and non-misleading information as set by the Financial Conduct Authority (FCA). 

The departure from the EU meant that the UK needed a thorough reassessment of the framework to enhance consumer protection and ensure it’s more focused on UK activity. Ideally, it would also promote innovation and international competitiveness, things that have been damaged since Brexit.

The new gateway is a way to improve consumer protection by allowing only qualified firms to approve financial promotions. ‘Approver firms’ are there to approve promotions for unauthorised persons. This is super important during the rapid changes we see within the crypto space in particular, where customers are left vulnerable to new products that they do not understand. 

The gateway that oversees those promotions is aimed at reducing misleading or unclear information. Essentially, it tries to mitigate poor financial decisions from retail investors and everyday consumers. 

The gateway becomes a formal way to maintain market integrity by ensuring that only compliant financial promotions reach the public, enhancing the FCA's oversight and accountability. Even if the firm isn’t regulated or qualified to advertise in the space, a qualified firm can on their behalf, but only through the gateway.

The FSMA 2023 in general was designed to make the regulatory framework more strict yet adaptable, which supposedly will make the UK more attractive to top-tier financial firms and investments. 

The New Regulatory Gateway Explained

Below we go into the different aspects of the new regulatory gateway and what it means for businesses within this space.

Overview of the New Gateway

The essence of this new regulatory gateway is to ensure that all authorised persons seeking to approve financial promotions for unauthorised entities are obtaining permission from the Financial Conduct Authority. 

In the previous regime, authorised entities could approve financial promotions without the need for a specific assessment of their competence in relation to the content being promoted. The gateway is now fully operational.

Implementation and Impact

The gateway is underpinned by changes to the Financial Services and Markets Act 2000, particularly through the introduction of the 'Financial Promotion Requirement' in section 55NA. 

This amendment aims to tighten the approval process for financial promotions regarding the authorisation process. This move is expected to mitigate the risks associated with non-compliant financial promotions, which have historically led to consumer loss.

The FSMA 2023 set out a comprehensive framework regarding the transition from retained EU law to UK-specific regulations. This included a staggered implementation of various provisions. This phased approach helped revocation and replacement of EU-derived legislation with UK-tailored regulations. In theory, this should help maintain regulatory continuity and stability.

Accountability and Regulatory Oversight

Another important aspect of the FSMA 2023 is its emphasis on enhancing the accountability and oversight of financial regulators. This includes the introduction of a secondary objective for the FCA and the PRA to support the international competitiveness of the UK’s economy, alongside their primary functions. 

The Act essentially mandates regular reviews of regulatory rules and introduces a better space for public engagement and scrutiny. So, there should be more transparency and responsiveness of the regulatory framework​.

The Designated Activities Regime (DAR)

The DAR represents another change. This regime aims to provide a flexible regulatory framework for certain financial activities that may not warrant full regulatory oversight as 'regulated activities'. Initially targeting activities previously governed by EU regulations, the DAR exemplifies the UK's intent to tailor its regulatory approach to better suit its market dynamics and the evolving landscape of financial services.

Assessment and Approval Process

The assessment and approval process is designed to ensure that firms seeking to approve financial promotions for unauthorised entities are adequately vetted for competence and expertise. This will establish them as an ‘approver firm’.

Key Elements of the Assessment Process

At the heart of the new regulatory gateway is a comprehensive assessment process conducted by the FCA. This involves evaluating the applicant firms' understanding of the financial products they intend to promote. It focuses on their ability to discern compliant promotions and their adherence to regulatory standards. 

The FCA's evaluation focuses on ensuring that firms possess the necessary knowledge and capability to review financial promotions accurately. If they can, then they can do it on behalf of unauthorised people, thus preventing misleading information from reaching consumers​.

Approval Criteria and Requirements

The FCA's approval process is not just a rudimentary or crude review but a detailed examination of the firm's internal policies and governance frameworks related to financial promotions. Firms must demonstrate a robust understanding of the regulatory landscape. For example, the principles regarding “clear, fair, and not misleading communications”. 

They are required to have effective systems in place and controls to manage the approval process. For example, due diligence on the content of promotions and the entities for whom they are approved​.

Reporting Obligations

Unsurprisingly, firms granted permission to approve financial promotions are subjected to ongoing reporting requirements. This ensures continuous oversight by the FCA and helps proactively identify and address any issues or non-compliance. The reporting requirements also create a solid feedback loop between the authority body and approved firms, which boosts the overall efficacy of the framework.

Implications for Firms and Consumers

The new amendments and gateway introduce some new implications for both firms and consumers within the UK's financial landscape. 

For unauthorised firms, the gateway represents a considerable shift in responsibility away from them. The gateway itself is a tool for authorised firms, and it reaffirms who bears the burden of compliance the most, which is the firm authorising the promotions.

Authorised firms intending to approve financial promotions for unauthorised entities must now juggle a more rigorous assessment process. It’s harder to get the necessary permissions. 

The demands for understanding the requirements are greater, and so is the need for robust internal governance. 

The implications for consumers are perhaps the most significant. By raising the bar for the approval, consumers are better safeguarded from potentially misleading or harmful financial advice and products. This has been rampant since the merging of lockdown (a rise in retail investors) and celebrity crypto projects.

This is particularly pertinent in an era where the complexity and variety of financial products are increasing. The means of communication are becoming more diverse and accessible, and therefore harder to monitor. For example, who is overseeing a (subtly promotional) livestream of an influencer promoting their crypto product? 

The new gateway isn’t the finalised way we will tackle financial promotions, but it’s expected to contribute to a financial marketplace where promotions are more reliable compared to yesteryear. The boost in customer trust can have wider implications, such as growth and investment in the industry.

The gateway introduces a proactive supervisory approach by the FCA, allowing for better oversight. Through ongoing reporting requirements for approved firms, the FCA aims to maintain a better pulse on the market.

Practical Considerations for Compliance

Understanding the practical considerations for compliance with the approval gateway for financial promotions is crucial. This section outlines the key areas of focus for firms to ensure adherence to the updated regulations.

Knowledge and Capability

Firms must ensure that their personnel involved in reviewing and approving financial promotions are well-versed in the relevant regulatory requirements. This is a primary consideration, as training and knowledge are what underpins compliance.

This includes a deep understanding of the FCA’s standards for “clear, fair, and not misleading communications”. Staff should be trained to identify potential compliance issues in financial promotions. There is no shortcut to this; no amount of AI tools or automation techniques can be trusted to have the final say.

Governance and Oversight

Robust internal governance structures are required when maintaining compliance with the new approval process. Firms should establish clear procedures for the review and approval of financial promotions, incorporating checks and balances to mitigate the risk of non-compliance. This might involve setting up dedicated committees or review teams with the authority to oversee the approval process and make informed decisions on compliance matters.

Record-keeping and Reporting

Effective record-keeping practices are also important when demonstrating compliance with the new gateway requirements. Firms should maintain detailed records of all financial promotions approved. As per the favourite mantra of maths teachers, the “workings out” is just as important as the answer, so make sure to include the rationale for approval and any associated risk assessments. These records will be vital for responding to any inquiries from the FCA and for fulfilling reporting obligations under the new regime.

Remuneration and Incentives

Firms should review their remuneration structures and incentives to ensure they do not encourage or reward non-compliant behaviour regarding the approval of financial promotions. Incentive schemes should be carefully considered to be aligned with compliance objectives, promoting a culture of adherence to regulatory standards.

What’s Next?

The FSMA—including the gateway—is now out in full force. Firms intending to approve financial promotions for unauthorised entities must have obtained permission from the FCA by now. If not already done, urgent action is required to apply for these permissions to ensure legal compliance and continuity of operations.

For firms already authorised, they must ensure ongoing compliance with the previously mentioned reporting, auditing, and training duties. Investment in training is one of the most important, yet underestimated, aspects. This investment shouldn’t be measured as ROI, but instead mitigating noncompliance costs.

The FSMA isn’t the first amendment, and it won’t be the last. It’s crucial to stay informed of further regulatory updates and guidance from the FCA, particularly regarding the DAR and any future amendments to the FSMA 2023.

Where possible, firms should participate in feedback opportunities offered by the FCA, as well as consultations. This helps foster a better framework going forward, which will in turn impact you. 

As for unauthorised firms, the gateway serves as a more formalised approach to promotions, where you must seek authorised firms to oversee your activity. While they’re not subject to the gateway approval process themselves, they still bear some responsibility for the compliance of their financial promotions.

Contact Englebert today for more information.

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