20 years since the FPO was made, and more than 15 since it was amended to facilitate exemptions from the financial promotion restriction for high net worth and sophisticated individual investors, Treasury is consulting on the next stage of the overall financial promotion regime review. Its key proposals will amend the exemptions that currently allow unauthorised firms to promote to individuals. Its aims are:
- to ensure the thresholds for use are calibrated properly such that they reflect investors’ experience or capacity to absorb loss;
- to reduce the risk that exemptions are used for promotions to investors who don’t meet the conditions; and
- to ensure investors who do fall within the exemptions understand the protections they lose and can take responsibility for their own decisions.
The HMWI and SCSI exemptions had been amended a couple of years after coming into effect, following complaints that they were not helpful as a result of the bureaucracy involved in getting certificates. The amendments therefore made it possible effectively for the individuals to self-certify that they met conditions, thus making them easier to use.
However, since then inflation, increased risk that individuals may be meeting the criteria by using amounts they have withdrawn from pension pots, technological changes and evidence of non-compliance with the exemptions by promoting firms have caused Treasury to seek a review.
Treasury still sees the benefits of the exemptions, for the purpose they were introduced, that is to allow business angels to invest in SMEs. However, to ensure they are not abused, Treasury proposes to move forward with 5 changes:
- increasing the thresholds for HNWIs : Treasury seeks view on what the new thresholds should be. Purely based on inflation, it should be £150,000 annual income and £385,000 net assets. However, Treasury sees a case for them being even higher than this – for instance, the amounts in 2001 reflected the top 1% of tax payers. To reflect that now, the figures would be £175,000 and £900,000.;
- amending the criteria for self-certified sophistication: Treasury thinks that having invested more than once in an unlisted company in the past 2 years is no longer a valid test, as it is now so easy to do this. Equally, the element of the test relating to directorship of a company with annual turnover of at least £1m has been devalued. Treasury proposed to update this to £1.4m and seeks views on how to address the test of sophistication otherwise;
- while Treasury does not propose returning to the third-party verification model, the requirement that firms “believe on reasonable grounds” that the exemptions are met does not oblige them actually to check – so there should be some mechanism which does oblige firms to do more than just get a certificate without doing anything to check whether what the investor says is accurate;
- updating the format of required statements to get greater investor engagement with what they are actually signing; and
- renaming the exemptions just to “high net worth individual” (without the “certified”).
Consultation closes on 9 March 2022.