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Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023

Volume 834: debated on Wednesday 13 December 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023.

Relevant document: 3rd Report from the Secondary Legislation Scrutiny Committee

My Lords, these regulations amend the exemptions from the financial promotion regime for high net worth individuals and self-certified sophisticated investors. I note that this statutory instrument was raised as an instrument of interest by the Secondary Legislation Scrutiny Committee. I will address the SLSC’s comments in the course of my remarks.

The exemptions that the Grand Committee is considering are designed to help small and medium-sized businesses raise finance from high net worth individuals and sophisticated private investors, or “business angels”, without the cost of having to comply with the financial promotion regime. These exemptions allow businesses to make financial promotions related to unlisted companies without being authorised by the FCA or having to follow FCA rules on financial promotions.

The existence of these exemptions reflects the important role that private individuals play in enabling SMEs to raise finance. However, as financial promotions made under the exemptions are not subject to the stringent safeguards of the financial promotion regime, the scope of the exemptions must be designed carefully to reduce the risk of consumer detriment.

These exemptions were last substantively updated in 2005. Since then, there have been significant economic, social and technological changes to the context in which they operate. For example, we have seen the development of an online retail investment market, which has made it easier for individuals to invest in unlisted companies. There has also been significant price inflation over the past two decades. Together, this means that many more consumers will fall within the eligibility criteria to use the exemptions than in the past.

In addition, there are concerns about misuse of the exemptions. They includes the risk of businesses seeking to use the exemptions to market investments inappropriately to less sophisticated ordinary retail investors. This risk was recognised in a report by the Treasury Committee in the other place, and it led to a recommendation for the Government to re-evaluate the exemptions to

“determine their appropriateness and consider what changes need to be made to protect consumers”.

In light of this changing context and that committee’s recommendation, the Government reviewed the exemptions and consulted on a set of reforms. Having considered the feedback to the consultation, the Government are bringing forward a set of amendments to the exemptions to address the risks that have been identified.

I now turn briefly to the substance of the statutory instrument. These regulations raise the financial thresholds to be eligible for the high net worth individual exemption to require an income of at least £170,000 in the last financial year or net assets of at least £430,000 throughout the last financial year. For the purposes of this exemption, net assets do not include an individual’s primary residence or their pension.

The regulations also amend the criteria to be eligible for the self-certified sophisticated investor exemption. They do this in two ways. First, they remove the criterion of having made more than one investment in an unlisted company in the previous two years. Following the rise of online investing, it is much easier for individuals to invest in unlisted companies than it was in 2005 when this exemption was introduced. The Government are of the view that this criterion is no longer an indicator of investor sophistication and that it should be removed. Secondly, the regulations increase the company turnover required to satisfy the criterion related to being a company director from £1 million to £1.6 million. This will mean that directors of companies with at least £1.6 million of turnover will remain eligible for the self-certified sophisticated investor exemption.

These regulations also improve the statements that investors are required to sign when using the exemptions. This should ensure that investors have a better understanding of the protections they lose when receiving financial promotions under these exemptions. The regulations will make minor and consequential changes, including applying these changes to promotions of collective investment schemes that invest in unlisted companies.

Further, the instrument amends the separate exemptions to the regulatory gateway for financial promotions, ensuring that those exemptions apply as intended. This is a rather technical area of policy, and I hope noble Lords will forgive me for taking a moment to explain the effects of these changes. First, the instrument amends the exemption that applies to authorised persons approving financial promotions of unauthorised entities that are part of the same group. Secondly, it amends the exemption that applies to authorised persons approving financial promotions of their appointed representatives in relation to regulated activities for which the authorised person, as principal, has accepted responsibility. The effect of these changes is to allow onward communication of the promotion by any unauthorised person. This brings the scope of those exemptions into line with the approach for the exemption that applies to authorised persons approving financial promotions that they have prepared themselves. This correction intends to ensure that any unauthorised person will be able to communicate a financial promotion where that financial promotion has been approved by an authorised person within the scope of any of the exemptions to the gateway.

I turn to the comments made by the SLSC. In its third report of this Session, the committee highlighted this statutory instrument as an instrument of interest. It encouraged the Treasury to reassess the financial thresholds more regularly in future, and the committee is right to note that these thresholds have not been updated in quite some time. The Government will keep the financial thresholds under review to ensure that they remain fit for purpose into the future.

The changes being introduced through these regulations take account of inflation over the past two decades and amend other eligibility criteria to reduce the risk of capturing ordinary consumers. Overall, these regulations are designed to reduce the risk of consumer detriment while ensuring that SMEs can continue to raise capital as a result of financial promotions made under these exemptions. I beg to move.

My Lords, let me say at the outset that we support this statutory instrument and the two that are to follow—but we do have some questions and comments. I note that, last week, the Commons debated all three instruments together, as one group. Why have the Government chosen to take a different approach in this House by splitting the debate into two sections? What does this signify, if anything?

Dealing with the instrument before us, we believe that it contains relatively uncontroversial and appropriate updates to existing legislation, following on from the TSC’s recommendations as made in its report on the collapse of London Capital & Finance in June 2021, as the Minister noted. The committee said that the FPO

“would benefit from reform due to the increasing risks associated with the exemptions that allow customers to self-certify as high net worth or sophisticated”.

It continued:

“The Treasury should—as a matter of priority—re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes need to be made to protect consumers”.

That was two and a half years ago. Perhaps the Minister could explain why it has taken so long to address the TSC’s recommendation. It is obvious that the risks addressed by the TSC continue to increase, as even a cursory glance at the inviting investment ads on any Tube train will show.

Some questions arise directly out of the consultation carried out by the Treasury in preparation for the SI. Angel investors had some doubts about raising the high net worth thresholds. They noted that raising the thresholds

“could reduce the potential for broadening angel network participation, including among less represented groups such as women and ethnic minorities. They also raised concerns that lower angel investor participation in the future could reduce SME investment, particularly for younger start-ups”.

I would be grateful if the Minister could tell us why these worries were discounted, particularly for the SMEs.

The consultation report also noted that

“many responses provided suggestions for improvements to the investor statements to ensure greater investor engagement. These included adding additional risk warnings and positive frictions, to encourage investors to engage meaningfully”.

These suggestions appear not to have been taken up by HMT. Can the Minister tell us why that is?

We also note that, in its third report, the SLSC encourages HMT to reassess the thresholds contained in this instrument on a more timely basis, as the Minister has mentioned. It is 18 years since the thresholds were last updated. Why cannot the Government agree to a regular—say, quinquennial—change to smooth out the boundary changes? In closing, I confirm again our support for the clearly necessary updates proposed by this SI.

My Lords, we agree with these regulations, but I will ask the Minister just one question, which follows on from the final question of the noble Lord, Lord Sharkey. As the Minister said in her opening remarks, the exemptions to the financial promotions regime were last substantively updated in 2005, nearly 20 years ago. Given current high inflation rates, and the fact that prices have already risen nearly 5% since the January 2023 data used to reset the thresholds in this instrument, these new figures could arguably be said to be already out of date. I note what the Minister said in her opening remarks, but can I push her to provide at least an approximate timeframe for when the thresholds are likely to be reviewed again?

I am grateful to both noble Lords for their contributions to this short debate. The noble Lord, Lord Sharkey, asked why we are doing this in two debates rather than one. I do not know, but I think it was probably decided by the business managers—whoever they may be. If one looks at the two SIs, they are substantially different and deal with different parts of the financial services market, so potentially that is why. Anyway, I for one am delighted to have the opportunity to get up twice and introduce two SIs, because I will be able to focus very much on the questions the noble Lord raised, and indeed the follow-up question from the noble Lord, Lord Livermore.

I only partially agree with the charge made by the noble Lord, Lord Sharkey, that the Government were too slow in addressing the TSC recommendation. The Government did take action: we launched a consultation in December 2021 and then took the time to consider the feedback we received. It is fair to say that we received a range of feedback, so we needed to think about the proposals and how we would take them forward. We reflected very carefully on that feedback. There was a balance to strike between better protection for consumers and being able to get much-needed capital into the SME sector. The noble Lord will know there is then that period during which nothing appears to be happening, but lots of lawyers are working very hard and drafting and preparing all the relevant legal and associated documents. So we are in a good place now and I am relatively content with the speed of progress.

The noble Lord asked whether the Government feel that there would be a reduction in investment in angel networks and SMEs. Again, we considered very carefully the various views shared by respondents on the financial thresholds to qualify for the high net worth individual exemption, because we recognise the importance of the angel investment community. We considered the responses and decided to increase the thresholds only in line with inflation, rather than bring forward a more substantial rise—which was advocated by some; obviously, others would not have wanted such a significant rise.

The exemptions will continue to facilitate angel investment in early-stage businesses and enable a broadening of angel network participation. This is the important point: where a person has been a member of a network of business angels for more than six months, they will still qualify for the self-certified sophisticated investor exemption. So there is a route through, provided that an investor joins the angel network, attends it and ensures that they fully understand what they are doing with their hard-earned cash.

The noble Lord, Lord Sharkey, then talked about investor statements; he felt that we had not gone far enough. However, the regulations make significant changes to the investor statements. First, the format of the investor statement is being updated, including making changes to the conditions to be considered a high net worth or self-certified sophisticated investor more prominent, and making it clearer to investors that promotions made under these exemptions may not be accompanied by any protections. So there will be change in what the statements look like.

Secondly, the language in the statements is being simplified: we are removing references to other pieces of financial services legislation, as that is unhelpful. We need to make it more consumer-friendly, such that all the information is in one place in plain English. Lastly, the statements will require greater investor engagement. The updated statements will require a prospective investor to select which criterion they meet. So they cannot just sign it; they will have to say that they meet a certain, specific criterion to be either a high net worth or sophisticated investor.

There has been much discussion about the updating of the thresholds, and I accept that 18 years is probably too long. However, I will not commit the Treasury to a particular date in the future for when the thresholds should be looked at again, because that will depend on what happens to inflation. There will be periods of very low inflation, when one would not want to update the thresholds, because, on the flip side, there would be an awful lot of familiarisation from investors and investee companies to ensure that they are keeping track with the exemptions. There is a balance, but I accept that we should—and we will—keep these financial thresholds under review, such that there is not a significant disconnect in future.

The noble Lord, Lord Livermore, asked why we used January 2023 inflation data. This is not rocket science. When we did the consultation, there were people who wanted the thresholds to be higher and those who wanted them to be lower. To a certain extent, that is why we came up with an approximation of the past 18 years’ inflation. Whether we chose January or a slightly later date for inflation probably would not have made a significant difference. It was necessary to choose a moment in time to make the revised calculation and we chose January to provide that certainty. We will watch inflation and review the limits and thresholds again in due course.

Motion agreed.