Shearman & Sterling LLP | FinReg | HM Treasury Proposes Amendments to the UK Financial Promotion Exemptions
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  • HM Treasury Proposes Amendments to the UK Financial Promotion Exemptions

    HM Treasury has launched a consultation on proposed changes to the financial promotion exemptions for high net worth individuals and sophisticated investors. The aim of the proposals is to mitigate the misuse of the exemptions by some firms marketing inappropriate products to ordinary retail customers and to update certain aspects that were introduced about 20 years ago. The Treasury Select Committee's report on the failure of London Capital & Finance recommended that the exemptions be rethought to ensure greater consumer protection. The consultation closes on March 9, 2022.

    The main proposals are:
    • Increasing the financial thresholds for high net worth individuals. HM Treasury requests feedback on whether, and how, the thresholds should be recalibrated. High net worth individuals are individuals who certify that they have earned at least £100,000 in the previous year or hold net assets of at least £250,000, with certain assets being excluded from the calculation.
    • Amending the criteria for self-certified sophisticated investors. HM Treasury proposes removing the criterion that an individual must have made one investment in an unlisted company in the past two years since it is a lot easier to meet this requirement than when it was first introduced. In addition, it is proposed that the threshold of £1 million should be increased when an individual has been in the last two years a director of a company with an annual turnover of at least £1 million.
    • Placing more responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated. Currently, a firm must 'believe on reasonable grounds' that the individual to which a communication is directed has signed the high net worth individual or self-certified sophisticated investor statement. HM Treasury proposes that this should be amended so that a firm is required to reasonably believe that an individual is a high net worth individual or self-certified sophisticated investor. Investors will still need to sign the investor statement.
    • Updating the high net worth individual and self-certified sophisticated investor statements. To address the risk of an investor incorrectly certifying themselves and/or not comprehending the regulatory protections they are giving up when receiving promotions subject to the exemptions, the government is proposing to: (i) update the format to highlight the conditions that are needed for an investor to be classed as a high net worth individual and self-certified sophisticated investor; (ii) simplify the language; and (iii) require the investor to state which conditions are met and how.
    • Removing "certified" from the name of the high net worth individual exemption since third-party certification is no longer required.

    These proposals tie in with other changes or potential changes to the U.K. financial promotion regime. Two significant changes are the introduction by the government of a regulatory gateway for approval by authorized firms of promotions of unauthorized firms and the FCA's proposals to strengthen the financial promotion rules to reduce consumer harm arising from investing in inappropriate high-risk investments that do not meet a customer's needs. Specific proposals on changes to the rules are expected in Q1 2022.

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