Background to the Regulatory Gateway for financial promotions

As set out in our previous Engage article, the Financial Services and Markets Act 2023 (FSMA 2023) establishes a new regulatory gateway for the approval of financial promotions by unauthorised firms (Regulatory Gateway). FSMA 2023 amends section 21 of the Financial Services and Markets Act 2000 to impose a new ‘Financial Promotion Requirement’ (FPR) on all existing and newly authorised persons, restricting them from approving financial promotions. The FPR requires authorised persons to seek prior FCA permission before approving financial promotions for unauthorised persons. The Regulatory Gateway comes into effect on 7 February 2024.

Existing authorised firms that want to continue to approve financial promotions for unauthorised firms must submit a variation of permission (VOP) application to the FCA. Firms applying for the first time to approve financial promotions will need to complete a new application form, the questions for which are set out in Annex 1 to the FCA’s final policy statement (PS23/13). The application window for the Regulatory Gateway opened on 6 November 2023 and closes on 6 February 2024. Firms will need to specify on their application, amongst other things, product types they want to approve financial promotions for and tailor it accordingly.

Firms that have not received FCA approver permission (Approver Permission) by 6 February 2024 will no longer be able to approve financial promotions, unless an exemption applies or until they have applied for and been granted permission by the FCA to approve financial promotions. Firms that have applied during the initial window which ends on 6 February 2024 will be able to continue approving financial promotions for unauthorised persons whilst waiting for the FCA to determine the application.

The FCA is introducing the Regulatory Gateway as it says that in recent years it has seen too many non-compliant financial promotions being approved by authorised persons and then communicated by unauthorised persons to consumers. As a result, consumers for whom the products and services promoted are inappropriate have been harmed. The FCA says that it has seen evidence of consumers investing in high-risk products that do not match their risk tolerance, due to poor-quality approved financial promotions.

The latest developments in relation to the Regulatory Gateway

On 12 September 2023, the FCA provided further detail on the Regulatory Gateway building on the framework set out in FSMA 2023 in the form of a final policy statement (PS23/13) setting out its approach to the Regulatory Gateway. In addition, on 6 September 2023, the Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023 (SI 2023/966) (the "Regulations") were made and subsequently came into force on 27 September 2023, creating three exemptions to the Regulatory Gateway. On 27 October 2023, the FCA published Handbook Notice 113 which sets out the Financial Promotion (Approver Permission) Instrument 2023 (the "Instrument"). The Instrument amends the FCA Handbook to implement the new Regulatory Gateway.

PS23/13 Final Policy Statement on the Regulatory Gateway

In FCA consultation paper 'Introducing a gateway for firms who approve financial promotions' (CP22/27) published in December 2022, the FCA consulted on various aspects of the Regulatory Gateway (further information on CP22/27 is set out in our previous Engage article). FCA policy statement PS23/13 sets out the FCA's response to feedback it received to CP22/27, as well as its final policy positions which include:

• how the FCA will assess applicants to the Regulatory Gateway and its basis for granting or refusing applications;
• reporting requirements for firms that are given permission to approve financial promotions;
• not extending the compulsory jurisdiction of the Financial Ombudsman Service to the approval of financial promotions;
• consequential updates and amendments to the FCA's non-Handbook guidance for firms that approve financial promotions for investments; and
• the FCA's review of its approach within 24 months of the rules coming into force.

PS23/13 supports legislative changes by the Government within FSMA 2023 which implements the Regulatory Gateway.

Implementing the Regulatory Gateway into the FCA Handbook

Following consultation in CP22/27 and confirmation of final policy in PS23/13, the FCA has made changes to the FCA Handbook by way of the amending Instrument, which came into force on 6 November 2023. In addition to amendments to existing Handbook provisions, the Instrument also introduces a new chapter, SUP 6A, which sets out the rules and guidance for applying for Approver Permission and a new annex, SUP 16 Annex 55R, which sets out the categories of investment for notifications and reports relating to approvals of financial promotions.

Exemptions from the Regulatory Gateway

The Regulations set out three exemptions which operate to exempt authorised persons from the Regulatory Gateway. Authorised persons will be able to approve financial promotions without applying for Approver Permission through the Regulatory Gateway, where one of the following exemptions is applicable:

• The authorised person that approves the communication also prepared the content of the communication,
• The unauthorised person prepared the content of the communication and is in the same group as the authorised person, or
• The content of the communication is prepared by an appointed representative, in relation to any regulated activity for which they have accepted responsibility under the responsibility of the authorised firm.

The application process

As summarised above, the provisions in FSMA 2023 setting out the Regulatory Gateway come into force on 7 February 2023 and the Regulatory Gateway will be operationalised on the same day. Firms will be able to submit applications through the Regulatory Gateway for Approver Permission during an initial application period which runs from 6 November 2023 to 6 February 2024. During this period, firms which have applied for Approver Permission will be able to continue approving financial promotions until their applications have been determined by the FCA. Additionally, existing authorised firms which already have Part 4A permission will be required apply to the FCA for Approver Permission by submitting a VOP application.

From 7 February 2024 onwards, firms which have failed to apply for permission during the initial application period will be precluded from approving financial promotions for authorised persons. Such firms may nonetheless apply for Approver Permission after the initial application period has passed, but will not be able to approve financial promotions until they have received the FCA's approval.

From 7 February 2024, the FCA will update its Financial Services Register to show firms’ ability to approve financial promotions for unauthorised persons.

The FCA has published a webpage containing guidance on the application process:

• Pre-application: Firms should consider relevant legislation, the FCA Handbook and guidance to ensure that (i) none of the exemptions are applicable, and (ii) they have the competence and expertise to approve the promotions for which they are applying for permissions.
• Preparing the application: Firms are required to complete the relevant application form, available on this FCA webpage from 6 November 2023 – 6 February 2024. Annexes 1 and 2 to PS23/13 detail the questions that firms will be required to answer in their application form relating to technical questions such as fees and the type of promotions the Approver is applying to approve.
• Submitting the application: In submitting their applications for Approver Permission, firms are required to include any relevant supporting documents and information, which must be up to date final versions of the relevant documents.
• Post-submission requirements: After submitting its application for Approver Permission, firms should be proactive and transparent in keeping the FCA up to date. In particular, a firm should notify the FCA of any changes in its circumstances or any new information which could affect the FCA's assessment of its application.

Post-approval obligations

In addition to the general requirement to comply with the Consumer Duty rules in approving financial promotions, the FCA has set out in Appendix 1 to PS23/13, specific reporting requirements for firms which have obtained Approver Permission.

Firms which have obtained Approver Permission must, within 7 days of the event occurring, notify the FCA each time it approves a financial promotion which relates to a product which either (i) is subject to a retail mass-marketing ban, i.e. non-mass market investments, or (ii) is a qualifying cryptoasset investment. Firms will also be required to give the FCA "reasonable notice" if they intend to begin or cease to approve financial promotions for products which are subject to marketing restrictions, and should consider whether a particular promotion or transaction is one for which the FCA would reasonably expect notice under Principle 11.

Additionally, firms which have obtained Approver Permission will be required to submit biannual reports to the FCA within 30 days of the end of each reporting period. A firm which applies for Approver Permission during the initial application period will be required to submit its first biannual report within 30 business days following either (i) its accounting reference date (ARD) or (ii) the date falling 6 months after its ARD, whichever falls first after the transitional period, being the period from 7 February 2024 and the date on which a firm's application is determined by the FCA, begins. Further details on information to be contained in each biannual report are set out in Appendix 1 to PS23/13.

Bringing cryptoassets into the financial promotions regime

New FCA financial promotions rules in relation to cryptoassets similarly aim to ensure consumers get the information they need to make informed decisions.

On 8 June 2023, the FCA published final rules (PS23/6) and a supporting guidance consultation (GC23/1) for cryptoasset financial promotions. The financial promotions regime was extended to promotions of qualifying cryptoassets on 8 October 2023. Our Engage article linked here sets out further details. The following routes allow firms to lawfully communicate such promotions to UK consumers:

• The promotion is communicated by an authorised person
• The promotion is approved by an authorised person
• The promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) but which is not an authorised person
• The promotion otherwise complies with the conditions of an exemption in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).

On 2 November 2023, the FCA published its Finalised non-handbook guidance on cryptoasset financial promotions (FG23/3) (the “Guidance”). While the Guidance does not create new regulatory obligations for firms, and, strictly speaking, firms do not need to follow the Guidance to achieve regulatory compliance, the FCA will treat a person as having complied with a rule or requirement if a person acts in accordance with the Guidance. The Guidance therefore serves as an important tool to assist firms in achieving regulatory compliance in relation to the communication and approval of cryptoasset financial promotions. For more information about the Guidance, please see our previous Engage article here.

Next steps for the Regulatory Gateway

Ahead of the Regulatory Gateway coming into effect, the following practical questions are likely to be relevant in determining whether a firm needs to take action in order to comply with the new Regulatory Gateway:

• Do your financial promotion activities fall within the scope of the Regulatory Gateway or one of the three exemptions?
• What practical steps will you need to take to gather the information necessary to complete the relevant application process depending on if you are applying for new approval or varying current permissions?
• Will the Regulatory Gateway require you to update your policies and controls?
• Have you considered how the Regulatory Gateway and the exemptions to it will impact your relationship with affiliates/influencers?

Given the relatively short application window for submission of Approver Permission applications before 6 February 2024, it is vital that existing authorised firms wishing to continue to approve financial promotions for unauthorised firms should make preparations to submit the relevant application forms as soon as possible. We continue to monitor for key updates in relation to this important development and can provide practical advice to ensure you are able to comply with the new Regulatory Gateway. Please get in touch with Michael Thomas and Aliya Padhani and your usual Hogan Lovells financial services regulatory contacts to discuss any questions you have in relation to the Regulatory Gateway.