Proposed changes to HNW and sophisticated investors’ financial promotions exemptions watered down

Posted on: 21 November 2023

Written by: Joanna Scott & Martin Lovick

On 7 November 2023, the Treasury published a response to its own Consultation on the financial promotion exemptions for high-net worth individuals and sophisticated investors, first launched back in December 2021. By way of reminder, these exemptions are derived from the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”). The Response paper summarises the feedback received together with its final position on each policy proposal.

Why is reform needed?

The original consultation set out several reasons why the current regime is not wholly satisfactory:

  1. The effect of inflation since the financial thresholds were set back in 2001.
  2. Increased responsibility on individual investors – for example, through greater freedom in accessing Defined Contribution pension pots.
  3. Technological changes in investment markets – for example, making it easier for individuals to invest in unlisted securities.
  4. Non-compliance and/or lack of engagement with the exemption criteria.

Have the government’s objectives changed?

Not entirely but, by the time of the Response, the government’s aims have narrowed somewhat to three main objectives:

  1. Ensuring that the threshold for exemptions are calibrated to reflect investor experience or their ability to bear losses.
  2. Reducing the risk that that investors receiving promotions under the available exemptions do not meet the relevant conditions.
  3. Where exemptions are used, that investors understand the regulatory protections that they are losing.

What are the main reforms?

The Treasury believes that the objectives (as above) are best met by the following amendments to the exemptions set out in Articles 48 and 50A of the FPO:

Increasing the financial thresholds to be eligible for the high net worth (“HNW”) individual exemption to:

  • Income of at least £170,000 (up from £100,000) in the last financial year; or
  • Net assets of at least £430,000 (up from £250,000) throughout the last financial year.

HM Treasury has chosen to go with its baseline proposal of increasing the figures in line with inflation, rather than setting the thresholds to capture the top 1% of income and wealth, which is what the original thresholds represented. The updated statement that individuals must complete, will emphasise that these figures do not include one-off pension withdrawals, given the recent introduction of pensions freedoms.

Further the word “certified” is being removed from the title of the exemption, as investors have not needed to be certified in order to use this exemption since 2005. The other main reforms are as follows:

Amending the criteria to be eligible for the self-certified sophisticated investor exemption by:

  • Removing the criterion of having made more than one investment in an unlisted company in the previous two years; and
  • Increasing the company turnover required to satisfy the ‘company director’ criterion to £1.6m (i.e. directors of companies with at least £1.6m turnover will remain eligible for the self-certified sophisticated investor exemption).
  • Requiring businesses to provide details of themselves in any communications made using the exemptions;
  • Updating the title of the certified high net worth individual exemption by removing “certified”;
  • Updating the high net worth individual and self-certified sophisticated investor statements; and
  • Applying these changes to the equivalent exemptions for promotion of collective investment schemes.

What does this mean for the FCA’s financial promotion exemptions?

As alluded to in the last point above, the FCA has exemptions for these categories of investor which mirror the above FPO. Notably these relate to the promotion of restricted mass market investments under COBS 4.12A and non-mass market investments under COBS 4.12B. However, the Treasury appears to have disregarded the FCA’s pronouncements in this area – for example, the FCA’s latest Perimeter Report published in July 2023 called for much higher HNW thresholds (partly to reflect the effect of inflation since these were first introduced), an end to self-certification as sophisticated investors and more stringent obligations on firms to verify investor statements. The FCA has stated that it is not aware of any other jurisdiction that allows firms to use exemptions purely based on investors ‘self-certification’. For these reasons, an automatic read-across from the new FPO exemptions into FCA rules does not seem certain.

When will the new thresholds come into effect?

The changes will be implemented through a Statutory Instrument, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023, was laid before Parliament on 6 November 2023, with the intention of bringing these into force on 31 January 2024 (subject to Parliamentary approval of the legislation). Given this very short lead time, firms that rely on these exemptions, will want to move quickly to bring relevant documentation up to date and ensure that they are prepared to comply.

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Joanna Scott

Joanna is a Consultant within our Capital Markets team.

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