Developments in the London listing markets: Financial Services and Markets Act 2023 and changes to UK financial promotion regime12 February 2024
"The FSMA 2023 creates the statutory framework but bestows the responsibility of setting detailed rules to the relevant regulators."
The first is the passing into law of the Financial Services and Markets Act 2023 (“FSMA 2023”) last summer, with a view to creating a smarter financial services regulatory framework for the UK that is flexible, less costly and more responsive to emerging trends. The second is the review of the regulation of financial promotions, in particular the reforms to the exemptions for high net worth individuals and sophisticated investors which took effect on 31 January 2024.
Our series of updates in relation to developments in the London listing markets from 2023 can be found here.
Financial Services and Markets Act 2023
On 29 June 2023, the FMSA 2023, which creates a new financial services regulatory framework for the UK and provides for repeal and reform of certain financial services legislation that it had inherited through its EU membership, received royal assent. It implements the proposals set out in the Future Regulatory Framework Review, established by the government in the wake of Brexit, with the aim of designing a Smarter Regulatory Framework (“SRF”) for the future based on the existing domestic model principally set out in the Financial Services and Markets Act 2000 (“FSMA model”). Under the FSMA model, the FSMA 2023 creates the statutory framework but bestows the responsibility of setting detailed rules to the relevant regulators; namely, the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). Our update from 1 February 2023, which outlined the key aspects of FSMA 2023 when it was at bill stage, can be found here.
As part of the Edinburgh Reforms (the financial services reforms announced by the Chancellor in November 2022), the government published a policy statement outlining its approach to delivering the SRF under FSMA 2023. On 11 July 2023, it published a plan for delivery describing how it will deliver its approach in practice. This states that each piece of retained EU law related to financial services is now within a “transitional period,” which will last until it is specifically repealed. This will occur in a phased and sequenced manner to ensure industry is able to plan ahead, and only when any replacement regime is finalised. Retained EU law will be replaced with a mixture of legislation introduced by government and approved by parliament and regulator rules in line with the balance of responsibilities in the FSMA model. This means industry stakeholders should largely expect firm-facing provisions to be defined through regulator rulebooks, reflecting the SRF’s objective to deliver a more agile, streamlined, accessible and coherent regime.
Certain regulations have already been made, bringing into force key provisions of the FSMA 2023 and commencing the repeal of certain secondary legislation considered unnecessary by the government.
"Retained EU law will be replaced with a mixture of legislation introduced by government and approved by parliament and regulator rules."
Delivering the SRF will entail significant structural reform of how the UK financial services sector is currently regulated. However, it remains to be seen exactly how far-reaching these changes will be and how long they will take, given the phased approach. Much like the reconstruction of a building and its foundations, the FSMA 2023 represents a replacement of a building’s foundations; a stronger framework on which the government and regulators alike can build. But the extent to which walls will be demolished, new ones rebuilt and entire rooms refurbished, is unknown.
Changes to financial promotion exemptions
Changes to the exemptions for high net worth individuals and sophisticated investors under the UK financial promotion regime came into force on 31 January 2024, updating them to reflect economic, social and technological changes that occurred since their original introduction (which had made thresholds easier to satisfy) and avoid their misuse. This follows a consultation by HM Treasury in December 2021, a response document published in November 2023 and secondary legislation implementing the changes being published in December 2023.
UK financial promotion regime
A financial promotion is a communication that contains an invitation or inducement to engage in a financial product or service. In the UK, the communication of financial promotions is subject to regulatory safeguards which seek to ensure consumers are suitably protected so that they can make informed and appropriate decisions.
"The financial thresholds to be eligible for the high net worth individual exemption have been raised in line with inflation."
In general, an individual or business cannot communicate a financial promotion unless (i) the content of the promotion is approved by a firm which is authorised by the FCA or PRA; or (ii) the individual or business is authorised itself; or (iii) an exemption to the regime applies. Breach of these is a criminal offence.
A number of exemptions exist which enable unauthorised persons to communicate financial promotions in certain circumstances, including to defined groups or individual investors. The original exemptions for certified high net worth individuals, sophisticated investors and self-certified sophisticated investors were introduced to help small and medium sized enterprises (“SMEs”) raise finance from sophisticated private investors, or “business angels”, without the cost of having to comply with the financial promotion regime and seek the approval of an authorised firm.
Government review of exemptions
The review of the high net worth individual and sophisticated investor exemptions was prompted by the fact that they had not been substantively updated since 2005 to reflect the economic, social and technological changes that have occurred since they were originally introduced (and which have made thresholds easier to satisfy). There was also concern about misuse of the exemptions, to market products to investors who are not high net worth or sophisticated.
Although the review considered all three exemptions for certified high net worth individuals, sophisticated investors and self-certified sophisticated investors, the actual changes made only relate to the exemptions for certified high net worth individuals and self-certified sophisticated investors. These two exemptions can only be used to market investments in unlisted companies (and not listed shares or those traded on AIM or the AQSE Growth Market).
The key changes are:
"Changes have been made to the statements that investors are required to complete and sign."
• increased thresholds for high net worth individuals – the financial thresholds to be eligible for the high net worth individual exemption have been raised in line with inflation to £170,000 of income in the previous financial year (up from £100,000) or to have held net assets of £430,000 throughout the previous financial year (up from £250,000); there is no change to the assets in scope of the net asset calculation (which, for example, exclude an investor’s primary residence and pension benefits);
• amended criteria for self-certified sophisticated investors – the criteria have been amended to:
• remove the criterion that an investor has made more than one investment in an unlisted company in the previous two years, as the rise in online investing means that this is no longer considered a reliable way to demonstrate sophistication; and
• increase the financial threshold in the “company director” criterion to £1.6m from £1m (so that directors of companies with at least £1.6m annual turnover in the last two years will remain eligible for the self-certified sophisticated investor exemption) – the government considers that this is a sufficiently high bar to demonstrate business success and sophistication and will exclude less experienced directors;
• updated title of the high net worth individual exemption to remove the reference to “certified” – this makes it clear that third-party certification is not required for this exemption;
• requirement for businesses to provide details in communications – businesses will be required to provide details about themselves in any communications made using the exemptions, e.g. company address, contact information and the company’s registration details (i.e. Companies House number or international equivalent). The purpose is to help prospective investors undertake due diligence on businesses that are marketing investments;
• updated investor statements – changes have been made to the statements that investors are required to complete and sign in order to be classified as high net worth individuals or self-certified sophisticated investors to update their format, simplify the language and require greater investor engagement. These aim to ensure investors correctly certify themselves and it remains their responsibility to do so. In particular:
• the sections of the statements have been reordered so that the conditions to be considered a high net worth or sophisticated investor now appear at the top of the statements. It is also made clearer that regulatory protections will be lost by receiving financial promotions under the exemptions;
• the language has been simplified by removing references to certain financial services legislation and including a more consumer-friendly explanation of which assets are not in scope of the net asset calculation; and
• investors must select the specific criteria that they meet in order to be classified as high net worth or sophisticated and must set out how they meet the relevant criterion e.g. in the case of the high net worth individual exemption, an investor will be asked to declare their income and/or the value of their net assets to the nearest £10,000/£100,000 respectively.
Senior Associate London
Knowledge Counsel London
Senior Associate London
"There is no transitional regime for the introduction of these changes so new financial promotions made from 31 January 2024... will need to be made in accordance with the updated exemptions."
The changes made to the financial promotion regime have also been applied to the equivalent exemptions under the regime restricting promotion of collective investment schemes.
Proposals not taken forward
The government had proposed placing a degree of responsibility on firms to ensure individuals actually meet the criteria to be deemed high net worth or sophisticated, rather than just believing on reasonable grounds that the relevant investor statements have been signed. Due to opposition to this proposal, this was dropped from the changes introduced on 31 January 2024.
Application of updated exemptions
There is no transitional regime for the introduction of these changes so new financial promotions made from 31 January 2024, even if made to individuals already promoted to under the original exemptions, will need to be made in accordance with the updated exemptions. However, where a business has made a financial promotion to an individual before 31 January 2024, in compliance with the original exemptions, that business will continue to be able to engage with the relevant individual in relation to the financial promotion made and will not be required to request an updated investor statement.
Other related initiatives
The review of these exemptions forms part of a wider initiative by the government and the FCA to review the regulation of financial promotions. The government is introducing new measures to improve the quality of financial promotions made by unauthorised firms and approved by authorised firms, through the introduction of a financial promotions gateway. This regulatory gateway was legislated for in the FSMA 2023 and will require any authorised firm wishing to approve financial promotions of an unauthorised firm to first obtain permission from the FCA, unless an exemption applies. The new regulatory gateway came into force on 7 February 2024.
"The final changes reflect the delicate balancing act required between updating the exemptions and ensuring these adequately protect consumers while preserving the ability of unlisted companies... to raise finance under the exemptions."
It is clear that the high net worth individual and sophisticated investor exemptions continue to have an important role to play in enabling angel investment in the economy and SME capital raising. However, the final changes reflect the delicate balancing act required between updating the exemptions and ensuring these adequately protect consumers while preserving the ability of unlisted companies, whether at an early stage of development or as part of pre-IPO fundraisings, to raise finance under the exemptions. Whilst the immediate effect of the changes may be to slightly reduce the available investor pool (mainly due to the effect of inflation-based increases to thresholds applied), it should come with increased assurance that those who can invest have the requisite experience and ability to absorb losses.
The reforms to the financial promotion regime are welcome in terms of modernising the regime and contributing towards the government’s goal of making the UK a more attractive place to start and grow businesses and for investment. In terms of wider financial services reform, there is a long way to go but we will be following the progress of these reforms over the coming months and will report on relevant changes, their timing and the practical implications for our clients and contacts.
Of particular interest is the responsibility placed on the FCA to enact the government’s proposals for the reform of the rules relating to prospectuses and making public offers, which aim to make fundraisings and listing on London’s various markets simpler and a more attractive option for UK and overseas companies. We will provide an update on how these proposals are progressing in a later article in this series.
London Trainee Laura Izquierdo also contributed to this article.
Senior Associate London
Knowledge Counsel London
Senior Associate London