Contributors
Regulated and unregulated firms who promote investment opportunities to individuals must check they comply with new thresholds and requirements coming into effect on 31 January. Anyone who continues to rely on the old thresholds won't be able to benefit from the exemption and may commit a criminal offence.
Who does this affect?
The financial promotion restriction under the Financial Services and Markets Act 2000 (FSMA) broadly bans the promotion of any investment except where that promotion is issued or approved by a person authorised under FSMA or is exempt.
Two commonly used exemptions allow unauthorised companies to make promotions of specific investments (essentially, investments in unlisted companies and related investments) to individuals who meet set criteria to be "high net worth" or "sophisticated". It's been a while since HM Treasury last reviewed the thresholds, and now it has decided to make change both to the thresholds and to what promotions relying on these exemptions should say.
How have the exemptions changed?
HNWIs: What has up to now been known as a "certified high net worth individual" will now just be called a "high net worth individual" (HNWI). To be a HNWI, an individual must either:
- Have an annual income of at least £170,000 (previously £100,000) or
- Have held net assets of £430,000 (previously £250,000) or more (excluding their home, pensions or rights under insurance contracts), and provide an indication of the value of those assets
SCSIs: For self-certified sophisticated investors (SCSIs), HM Treasury has made a significant change. Previously, an individual could be an SCSI if they had invested in unlisted companies in the recent past, but Treasury felt this is no longer a good indication of sophistication. Now an individual must meet one of three conditions to be an SCSI:
- They have worked in a professional capacity for the private equity sector or in provision of finance for SMEs in the past two years
- They have been the director of a company with an annual turnover of at least £1.6m in the last two years (and provide details of the company) or
- They have been a member of a network or syndicate of business angels for more than six months or are still a member.
Statements: In either case, the individual must sign a statement confirming which condition they meet and making a declaration. The new forms are shorter and clearer than the old ones, and now include a box that enables them to say that none of the conditions apply – in which case the exemption won't apply. The form also requires the individual to acknowledge that:
- They will not have any protection from any of the FCA, Financial Ombudsman Service or Financial Services Compensation Scheme
- The promotions they receive may not comply with FCA rules and
- They could lose all the money they invest
The forms also now make it clearer that individuals meeting the criteria can choose to be classified as a HNWI or SCSI. They don't have to make that choice, and if they don't sign the statement, promotions to them won't be exempt.
The requirement that the statement must be no more than 12 months old hasn't changed.
What else has changed?
There are also new additional requirements on promoters relying on the exemptions. In addition to the existing requirements (such as the risk warning that must be in bold black font in a black edged box at the start of the promotion which warns investors that the promotion is not approved and that an investor will risk losing anything they invest), the promoter must include information about itself and details of how to contact it.
What hasn't changed?
These changes affect only HNWIs and SCSIs. There are no changes to the exempt category of "certified sophisticated investor". These investors have certificates signed by authorised advisers confirming their level of sophistication. And, as we've mentioned above, none of the other requirements for using the exemptions have changed either – the scope of investments, the need for the promoter to have believe on reasonable grounds that the individual is a HNWI or SCSI, and the form and content requirements for the warnings on the promotional document are all the same.
