In December, the FCA opened a consultation on changes to the way financial promotions are approved, following concerns that the current system is leaving consumers open to harmful and misleading promotions. Under the current system, only an authorised person can approve a financial promotion (either for themselves or by approving a financial promotion for an unauthorised person *). This means that presently, many unregulated firms rely on other regulated businesses to approve financial promotions for them (known as “section 21 approvers”).
The consultation introduces a new regulatory gateway so that authorised persons will no longer have the authority to approve financial promotions for non-authorised persons, unless they apply to the FCA for permission to do so, via a variation of permission (“VoP”) application. In addition, a section 21 approver, if granted access through the gateway, will also be required to hold sufficient “competence and expertise” in the subject matter of the promotion before they can approve it. This is part of the FCA’s commitment to ensuring that the person approving the promotion can judge its compliance with the financial promotions rules and continue to monitor that compliance effectively.
The FCA envisages giving permissions to approve specific types of financial promotion, with very few firms being given permission to approve all types of promotion. Additionally, section 21 approvers will need to notify the FCA within a week of making any approval, withdrawal, or amendment of a financial promotion. They will also have to produce a bi-annual report to the FCA detailing promotions that they have approved. These changes may prove overly burdensome for some section 21 approvers.
Fully authorised firms are likewise coming under increasing scrutiny in relation to financial promotions, as demonstrated by the recent DeadHappy case. The matter centred on an advert for life insurance featuring an image of renowned serial killer Harold Shipman, with the strap line “because you never know who your doctor might be”). Whilst DeadHappy is a fully authorised business that was able to approve its own financial promotions, the case demonstrates the action the FCA will take if it considers firms are falling foul of its rules. DeadHappy, which uses the slogan “Life insurance to die for”, met with stark criticism from the regulator following its recent ad campaign, which resulted in restrictions being placed on its financial promotions activities, which requires it to:
The restrictions have been imposed through a Voluntary Application for Imposition of Requirement (“VREQ”) which the FCA uses to ask firms to voluntarily accept a variation of permission and/or specific requirements. If firms refuse to accept the VREQ, the FCA may impose the conditions through an Own Initiative Application for Imposition of Requirement (“OIREQ). VREQ and OIREQ powers are only used where the FCA suspects that serious misconduct may have occurred, and harm needs to be prevented immediately*.
DeadHappy was also reported to the Advertising Standards Agency (“ASA”). It apologised for any offence or distress caused by the adverts and removed them within 24 hours, once it became clear the adverts were causing offence, as detailed in the ASA’s ruling.
The case highlights the FCA’s powers to step in and take action to prevent the spread of promotions that it deems harmful and their appetite for further controls in this area. DeadHappy is now in a position where it needs to find its own s21 approver, as unregulated firms do. In an environment where the FCA is increasing its focus generally on financial promotions, it remains to be seen whether there will be a decreasing willingness of authorised firms able to act as s21 approvers.
The FCA is keen to further its powers to collect more data on the number and quality of promotions and their approvers. It reinforces the FCA’s desire to become a more data driven regulator, allowing it more opportunity to analyse and step in more quickly where it identifies patterns of consumer harm.
We see this in its 2022 data, which indicates there were 8,582 promotions from authorised firms that were amended or withdrawn (an increase of 1,398% from 2021). For unauthorised firms, 1,882 alerts were issued (an increase of 34% on 2021, against a backdrop of a 24% decrease in total reports received, compared with 2021).
From an industry perspective, one of the main concerns about the FCA’s plans is the difficulty that unregulated firms may face in finding a suitable approver now that access through the gateway is required of section 21 approvers. Identifying someone with the required competence and expertise, and who is willing to take on the additional regulatory burdens that the changes will bring, may present a challenge for some firms.
The consultation closed on 7th February 2023, and we await a policy statement from the FCA, expected in the first half of this year. Together with the proposed legislative amendments to section 21 FSMA *, the expectation is that the FCA will consult on final rules quickly and open the gateway as soon as possible (although this is dependent on the legislative timeline and the Financial Services and Markets Bill receiving Royal Assent).
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* Section 21 Financial Services and Markets Act 2000, referred to as the financial promotions prohibition.
* See the FCA’s approach to enforcement document at page 10
* via the Financial Services and Markets Bill 2022/23