As of 31 January 2024, significant changes are set to take effect in the certification process for high net worth individuals (HNWI) and sophisticated investors.
These amendments, extending across England, Wales, Scotland, and Northern Ireland, will impact the financial promotions landscape, requiring individuals and firms to adapt to the new rules.
Financial Promotions – An Overview:
Under the Financial Services and Markets Act 2000 (FSMA), a financial promotion refers to any communication made in the course of business that contains an invitation or inducement to engage in investment activity. This can include a wide range of communications such as advertisem*nts, brochures, websites, and other forms of promotional material.
The Financial Promotion Restriction, as outlined in FSMA, makes it a criminal offence for firms that are not authorised under FSMA to make financial promotions, unless certain conditions are met. The two primary conditions are:
Approval by an Authorised Firm: The content of the financial promotion must be approved by a firm that is authorised by the Financial Conduct Authority (FCA). This means that an authorised entity must review and approve the promotional material before it is disseminated.
Reliance on Exemptions: The firm making the financial promotion may rely on exemptions outlined in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). Exemptions provide certain categories of communications that are not subject to the full restrictions, making them legally permissible.
Many companies and funds rely on exemptions when promoting the sale of shares to two distinct groups: HNWI and sophisticated investors. Under the exemptions, HNWI are expected to be adequately wealthy, making them capable of withstanding potential investment losses. On the other hand, sophisticated investors are presumed to have sufficient experience to understand the risks associated with the investment. Importantly, individuals falling into either category can self-certify their eligibility for these exemptions, streamlining the process.
Key Changes and Reforms:
The changes arise from the need to address concerns related to the misuse of exemptions for HNWI and sophisticated investors, which have remained unchanged since 2005. The Government, as part of a broader financial promotions regime reform, aims to adapt to significant economic, social, and technological changes, ensuring the effectiveness of existing exemptions and preventing inappropriate marketing of products to retail investors.
The amendments redefine the criteria for certifying HNWI and self-certified sophisticated investors. Notably, the certification forms will undergo revisions, introducing more stringent requirements for individuals to classify themselves as eligible for these exemptions.
The key changes to note are:
Eligibility Thresholds: The financial eligibility thresholds to rely on the HNWI exemption are increasing to require the individual to have an income of at least £170,000 and net assets of at least £430,000 throughout the last financial year (the figures currently being £100,000 and £250,000 respectively).
Sophisticated Investor Criteria: The criteria to rely on the sophisticated investor exemption is also being amended. Amendments include:
the removal of the requirement for the investor to have made more than one investment in an unlisted company in the last two years.
An increase to the amount of turnover by a company which the individual is a director of from £1 million to £1.6 million.
Information Disclosure: Businesses will be required to provide detailed information about themselves in communications using exemptions, including company address, contact information, and registration details.
Certification Title Update: Given under the new regime third-party certification will no longer be a requirement, the title of the “certified HNWI” exemption will be updated to remove reference to the word “certified”.
Form Simplification: The forms for HNWI and self-certified sophisticated investors will be revised to simplify the language and improve the overall format.
Actions for Firms:
To ensure compliance with the Financial Promotion Restriction after the 31 January 2024 changes, firms should take the following steps:
Review records of existing financial promotions to check they are up to date and, where current exemptions have been relied on, contain the necessary investor statements.
Consider whether existing recipients of financial promotions still satisfy the new criteria for being categorised as HNWI or self-certified sophisticated investors and whether any further steps are required to ensure compliance.
Revise their procedures for making financial promotions to align with the reformed regulations and provide training to staff to ensure compliance with the updated procedures and the Financial Promotion Restriction.
These regulatory changes aim to enhance investor protection and bring financial promotion exemptions in line with contemporary economic and technological realities. Firms must adapt to these changes to ensure compliance and maintain a secure and transparent financial environment.
further information
If you would like any further information on the issues discussed in this article, please contact Mei Chungor another member of our .
about the authors
Emily joined Kingsley Napley in January 2019 as a Paralegal in the Regulatory team before progressing as a Senior Paralegal in October 2019 and a Managing Paralegal in February 2021.
Prior to commencing her training contract, Emily investigated and prepared fitness to practise cases relating to professional misconduct, conviction, ill-health, and lack of competence on behalf of the Health and Care Professions Council. Emily has experience working with a variety of regulatory bodies, including the Education Workforce Council, General Optical Council, General Dental Council and the Architects Registration Board.
Mei is an Associate in the Corporate, Commercial and Finance team and joined Kingsley Napley in August 2021 from a regional firm. She advises entrepreneurs, investors and established businesses across a variety of sectors on a broad range of corporate and commercial matters.
