Understanding financial promotions
This is an updated article which originally appeared in DPB Update, No 1. It has been updated to reflect subsequent changes in the Financial Promotions Order (FPO). The main changes have been made under FPO articles 48, 50 (there is a new article 50A) and 15.
Understanding the Financial Promotions Order (FPO)
From 1 December 2001 only firms authorised by the FCA (previously, the Financial Services Authority [FSA]) are able to issue or approve communications made in the course of business which amount to a financial promotion under section 21 of the Financial Services & Markets Act 2000 (the Act). No equivalent allowance exists under the Designated Professional Body (DPB) arrangements and DPB firms are not able to approve or issue financial promotions.
Firms must either be authorised to issue or approve a financial promotion or use an exclusion available for the particular promotion. Some of the exclusions can only be used by a DPB licensed firm as described below.
A financial promotion is defined in section 21 as being ‘an invitation or inducement to engage in investment activity, communicated by a person in the course of business’. The restriction applies to any form of communication whether written or oral.
Financial promotions are a complex area. The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005 No 1529) (FPO) defines the controlled activities and controlled investments for the purposes of section 21 of the Act. It also contains a large number of exemptions and only those of particular interest to unauthorised firms (i.e. firms not authorised by the FSA) are discussed here. If a firm is unsure about any promotion it is making, it should seek external advice.
The FPO uses a number of terms to describe a communication. These are key to understanding the financial promotion regime and are described in the following table.
|Real time||Telephone calls, personal visits, meetings, etc|
|Non-real time||Brochures, websites, advertisement letters and emails, etc which create a record of the communication|
|Solicited||A communication initiated by the recipient or that takes place in response to a request from the recipient of a financial promotion|
|Unsolicited||A communication made without express invitation|
Thus a communication can be solicited or unsolicited and then either real time or non-real time.
The FPO uses the terms ‘controlled activities’ and ‘controlled investments’. These are effectively the ‘regulated activities’ and ‘regulated investments’ of the Regulated Activities Order (RAO) but without the exclusions of the RAO. Thus, making a promotion about an activity or investment that is covered by an exclusion in the RAO is still a financial promotion even though providing the service, etc is not a regulated activity.
For example, services offered in connection with the sale of a body corporate are, in certain circumstances, exempt under article 70 of the RAO (i.e. it is not a regulated activity). But any communication made in relation to this would be restricted under section 21 of the Act unless one of the exemptions in the FPO can be applied. Firms will not need to be authorised by the FSA in order to take advantage of the exemptions in the FPO although some of these will be particularly relevant to DPB licensed firms.
Controlled activities and controlled investments are defined in the FPO as follows:
- Accepting deposits
- Effecting or carrying out contracts of insurance
- Dealing in securities and contractually based investments
- Arranging deals in investments
- Managing investments
- Safeguarding and administering investments
- Advising on investments
- Advising on syndicates participation at Lloyd’s
- Providing funeral plan contracts
- Providing qualifying credit
- Arranging qualifying credit
- Advising on qualifying credit
- Agreeing to carry on specified kinds of activity
- A deposit
- Rights under a contract of insurance
- Shares or share capital of any body corporate
- Instruments creating and acknowledging indebtedness
- Government and public securities
- Instruments giving entitlement to investments
- Certificates representing certain securities
- Units in a collective investment scheme
- Rights under a stakeholder pension scheme
- Options, futures, contracts for differences
- Lloyd’s syndicate capacity and syndicate membership
- Funeral plan contracts
- Agreements for qualifying credit
- Rights to or interests in investments
Exclusions for DPB licensed firms
Firms licensed under ICAEW’s DPB arrangements benefit from two particular exemptions in the FPO which have been specifically designed for DPB firms. These are provided in articles 55 and 55A.
Article 55 allows DPB licensed firms to make solicited or unsolicited real-time communications (i.e. the firm can respond to requests or can initiate discussions about investments with clients). This is provided the firm is carrying on a regulated activity falling with the DPB arrangements and the communication is to someone who has already engaged the firm to provide professional services. In addition, the promotion must relate to an activity allowed by the DPB arrangements or which would be a regulated activity but for the exclusion in article 67 of the RAO (which concerns activities that are reasonably a necessary part of professional services).
Other than article 67, no other exclusion in the RAO can be used in conjunction with article 55.
Article 55A exempts any non-real time financial promotions (e.g. a brochure or website) where they relate to a DPB activity and contain a specified statement disclosing the firm’s status under the Act. The prescribed wording is as follows:
"This [firm/company] is not authorised under the Financial and Services and Markets Act 2000 but, in certain circumstances, we are able to offer a limited range of investment services because we are ICAEW. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide."
This will enable the firm to issue printed brochures or material on a website without the need for this to be approved by an authorised person. This will be an important exemption for DPB firms to enable them to refer to their regulated activities in advertising material and was only achieved after lobbying by ICAEW. The FSA has advised that it will not be necessary to repeat the statement whenever a DPB activity is mentioned in a brochure or other non-real time financial promotion. Firms should be aware that, if the brochure advertises the financial services of a third party, this will become a financial promotion and will need to be approved by an authorised person. This is discussed in more detail under article 15 below.
Article 55A can only be used in relation to activities that can be carried on by a DPB licensed firm and cannot be used for transactions that are excluded under the RAO such as the sale of a body corporate. Licensed firms that cannot meet this exemption may still be able to make a financial promotion if this meets one of the other exemptions in the FPO, some of which are discussed below.
Article 14 on follow-up communications
A firm can make a follow-up communication to a previous communication that was itself exempt under the FPO. This applies to any non-real time or solicited real time follow-up communication.
This exemption can only be used in certain circumstances:
- The original communication relied on an exemption that itself required particular information or statements to accompany it (eg, articles 48 to 50A, promotions to high net worth individuals, companies or sophisticated investors, that require the inclusion of various warning statements)
- The follow-up is made within 12 months of the first communication and to the same recipient
- It is about the same subject as the first communication
Thus if a firm has made a communication to a high net worth individual (which requires additional information to be provided with the communication), it can send a follow-up communication to that same individual about the same subject. Article 14 would not apply if the communication was made in reliance on article 28 (one off promotions).
Article 15 and introductions
This exemption applies to any communication (real time or non-real time) made with a view to introducing the recipient to an authorised person or exempt person provided:
- The authorised or exempt person is not part of the same group as the firm
- The professional firm does not receive any form of payment except from the client
- The recipient has not sought investment advice from the firm
If the exemption cannot be met, the firms may wish to consider asking the authorised firm to approve a non-real time promotion, such as a brochure. An authorised firm cannot approve a real time promotion. Where the reference to the introduction is fairly basic, the associated, authorised firm can approve the promotion on a straightforward and simple basis, provided it contains no more than the information allowed by paragraph 3.2.5 (5) of the Conduct of Business Sourcebook. If this applies, under paragraph 3.2.4 (2) the authorised firm has to ensure that the promotion is fair, clear and not misleading. No ‘approval’ statement is needed on the brochure and there is no record-keeping requirement for the authorised firm approving the promotion.
If the brochure identifies a third party who is not associated with the firm, this will also need approval. This can be done by the third party using the process outlined above.
The FSA has confirmed that a letter sent to a client providing the name of a firm to whom business can be introduced will be covered under article 28, one-off financial promotions. This will also apply to a solicited discussion that provides this information.
If, in its promotional literature, a firm wishes to make a general statement that it can make introductions, it would probably be more appropriate to use the generic promotions exemption (see below).
Article 17 on generic promotions
This excludes promotions which do not identify (directly or indirectly) a person who provides the controlled investment to which the financial promotion relates or identifies any person as being a person who carries on a controlled activity in relation to that investment.
Where a document indicates that the professional firm can refer the client to another firm for the provision of investment services or activities, but does not identify the other firm or the specific activities, Article 17 can be used by the firm and the statement is not a promotion. A suitable wording would be:
"In certain circumstances, we are able to offer a limited range of investment services. If you need more complex advice on investments, we may have to refer you to someone who is authorised by the Financial Conduct Authority (previously the Financial Services Authority [FSA]) as we are not."
If the brochure or document refers to specific types of investments, such as pensions, Article 17 may not be met and approval would therefore be needed.
If the client then asks for an introduction, Article 28 relating to one-off non-real time financial promotions will apply and the name of the other party can be provided.
Article 28 and one off non-real time and solicited real time communications
This article provides that financial promotion restrictions will not apply to a one-off non-real time communication (i.e. a letter) or a solicited real time communication (i.e. a conversation) which is personal to the recipient and is not part of an organised marketing campaign.
The FSA considers a one-off financial promotion can occur where a person ‘applies his mind to the individual circumstances of the recipient and tailors the financial promotion accordingly.’ Expressed differently, is it reasonable to expect the recipient to be interested in the subject matter of the promotion. So approaches made to a number of persons at the same time could be exempt, provided the firm is satisfied that each recipient’s circumstances are such that they would be interested in the promotion. The firm must consider whether this would amount to an organised marketing campaign which it is not allowed to do.
This exclusion would also apply to a request from a client to provide the name of an authorised firm to whom the client can be introduced.
Article 28A provides that unsolicited real time communications will not be caught:
- If the communication is one off; and
- If the firm making the promotion reasonably believes that:
- the recipient of the promotion understands the risks associated with engaging in the investment activity to which the promotion relates;
- the recipient would expect to be contacted by the firm in relation to the investment activity to which the promotion relates.
It will be for firms to make a judgement on the last two points. The FSA has indicated that it would be safe to assume that the person understands the risk where he is understood to be a professional or to be professionally advised in relation to the investment activity.
The exclusion will benefit DPB firms, for example, when a firm needs to contact another party, or their professional advisers, to find out if they are willing to proceed with a transaction.
Article 62 on the sale of a body corporate
This exemption covers communications relating to the sale of a company made on behalf of a body corporate, a partnership, a single individual or a group of individuals.
This means that ICAEW firms will be able to take advantage of the exemption when the communication relates to a transaction where:
- The shares consist of or include 50% or more of the voting shares in the body corporate (or together with any shares already held by the person acquiring them, consist of or include at least 50% of such shares)
- The acquisition or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals
If the above conditions are not met, the exemption can still be used if the object of the transaction may reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate.
This exclusion is similar to article 70 of the Regulated Activities Order.
Articles 19 and 48 to 50A on communications to investment professionals, high net worth individuals, companies, etc
Financial promotions made to investment professionals, high net worth individuals or companies, etc and sophisticated investors are exempted under the above articles.
For communications made to an investment professional (article 19) to be exempt, the person making the communication must believe on reasonable grounds that the recipient is an investment professional. The FPO states that an FSA authorised firm is an investment professional as is a person whose ordinary activities involve him in carrying on the activity to which the communication relates. So a communication about an investment to an organisation known to make investments would be exempt.
With respect to firms of chartered accountants, the FSA has said that a firm can be regarded as an investment professional if the communication made to it relates to a controlled activity which it may be expected to engage in during the course of its ordinary activities. It would not apply if the communication invited the firm (or its partners) to make personal investments.
There is a separate article covering the exemptions under articles 48 and 50A.
The exemption under article 49, allows promotions to be made to high net worth companies, unincorporated associations or trusts and it applies to any communication.
These are defined in the FPO as (although the FPO should be referred to for the full definition):
- If there are more than 20 members then called up share capital or net assets must exceed £500,000
- If it is a subsidiary of another company which has more than 20 members, called up share capital or net assets must exceed £500,000; in any other case called up share capital or net assets are more than £5m
Unincorporated associations or partnerships:
- Net assets of more than £5m
- The value of the cash or investments which form part of the trust assets must exceed £10m
Although there are no restrictions on the types of investments, etc, there are a number of conditions attached to the exemption for high net worth companies, etc. The communication must indicate the persons to whom (i.e. those above) it is directed and that others should not act on the communication. Also the person making the communication should have systems in place to prevent recipients other than the persons listed above engaging in the activity described in the communication.
There is no need for the entities to hold any form of certificate confirming their status but the firm making the promotion must reasonably believe that the entity meets the relevant criteria.
Some of the above exemptions will only apply where a real time solicited communication is made; i.e. the client initiates the communication or the firm responds to a request from the client. An example is a follow-up communication (article 14) where the firm has made a financial promotion but cannot discuss the matter unless the client so requests. Also, for the firm to provide a proper service to the client, it may be necessary to contact the client without specific permission. In these cases the FSA considers it advisable for the engagement letter to draw specific attention to the possibility of the firm making an unsolicited real-time financial promotion. The firm should obtain the client’s specific acceptance of this.
A suitable paragraph for the engagement letter would be:
"To enable us to provide you with a proper service, there may be occasions when we will need to contact you without your express permission concerning investment business matters. For example, it may be in your interests to sell a particular investment and we would wish to inform you of this. We may therefore contact you in such circumstances. [We would, however, only do so in our office hours of...]. We shall of course comply with any restrictions you may wish to impose which you should notify to us in writing."
If the client signs the engagement letter, there should be a specific reference back to the above paragraph.
If the firm had previously (i.e. before 1 December) received the client’s permission, this will still be valid.
Insolvency practitioners are exempt persons under the Act. This means that, when acting within the meaning of section 388 of the Insolvency Act 1986, they are not stopped by the general prohibition under the Act from conducting regulated activities.
Similarly, article 16 of the FPO allows such an insolvency practitioner to make non-real time communications or solicited real time communications in the course of carrying out insolvency work.
There are a large number of exclusions within the FPO that should allow firms to undertake a range of communications without needing authorisation. But, financial promotions are a complex area and firms should be careful that they do not stray beyond the limits of any exclusion.