UK HNW and Sophisticated Investor Exemptions: More Financial Promotion Changes

We wrote on the impact of changes to the financial promotion rules that came into effect earlier this year. On 7 November 2023, the UK Government published the proposed changes to the Financial Promotion Order 2005 (FPO). The proposed changes accompanied its response to its consultation on the changes to the FPO exemptions for high-net-worth individuals and sophisticated investors (2021 Consultation). The changes will result in:

• Raised financial thresholds to qualify for the exemptions to account for inflation
• Tightened eligibility criteria to reduce the risk of capturing ordinary consumers
• More robust statements that investors will be required to complete when using the exemptions

The changes are due to come into effect on 31 January 2024. The Financial Conduct Authority will also likely consult on further changes to its rules.

The proposed changes were published at the same time as a set of amendments that are due to come into force on 1 January 2024. These are designed to conform to primary and secondary legislation following changes to the Financial Services and Markets Act 2023 (FSMA 2023). They include changes to reflect the repeal of retained EU law.

What the FPO Amendments Seek to Achieve

The 2021 Consultation identified three objectives for reform:

• Ensure that thresholds for exempt investors are calibrated to reflect investors’ experience or their ability to absorb losses.
• Reduce the risk that investors receiving financial promotions under the exemptions do not meet the relevant conditions.
• Ensure that, where exemptions are used, investors understand the regulatory protections they are losing and are able to take responsibility for their investment decisions.

How They Achieve This

The government sought to achieve these objectives through amendments to the FPO that:

• Increase the financial thresholds to be eligible for the high-net-worth individual exemption to one of the following:
  • Income of at least £170,000 in the last financial year
  • Net assets of at least £430,000 throughout the last financial year
• Strengthen the criteria to be eligible for the self-certified sophisticated investor exemption by taking both of the following actions:
  • Removing the criterion of having made more than one investment in an unlisted company in the previous two years (reflecting the rise in online investing making it easier to invest in unlisted companies).
  • Increasing the company turnover required to satisfy the “company director” criterion to £1.6m (i.e., directors of companies with at least £1.6m turnover will remain eligible for the self-certified sophisticated investor exemption). Again, this is in line with inflation since the previous threshold was set in 2005.
• Require businesses to provide details of themselves (including the company address, contact information, and registration details) in any communications made using the exemptions.
• Update the title of the certified high-net-worth individual exemption by removing “certified,” reflecting the 2005 update to the FPO removing the requirement to be certified by a third party.
• Update the high-net-worth individual and self-certified sophisticated investor statements with the aim to achieve greater engagement from investors and higher awareness of the regulatory protections they will lose.

Similar changes are also proposed for Promotion of Collective Investment Schemes Exemptions Order 2001.

Some Relief?

Although there are no transitional provisions, with the changes coming fully into effect on 31 January 2024, Article 14 of the FPO does allow subsequent follow-up financial promotions relating to the same matter within 12 months of the recipient’s receiving the first communication. Therefore, where a firm has made a financial promotion to some recipients classified under the current regime, it will be able to engage with the relevant individual in relation to that financial promotion without requesting an updated investor statement until 31 January 2025.

To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.