Promotion of investments is subject to restriction under S21 of the Financial Services and Markets Act 2000 (‘FSMA’). FSMA provides that financial promotion can only be made by authorised persons where the content is approved by them or is relying on an exemption. An authorised person is one who is authorised and regulated by the FCA.
For the purposes of FSMA “investment” is interpreted widely, as set out in detail under The Financial Services and Markets Act 200 (Regulated Activities) Order 2001 and to include any asset, right or interest including crypto-assets.
The meaning of “promotion” is set out in the FCA Handbook as “an invitation or inducement to engage in investment activity or to engage in claims management activity that is communicated in the course of business”. Again, this widely worded interpretation means that almost all promotion, advice or suggestion to purchase financial products to individuals or the public at large are restricted activities that can only be carried out by authorised persons.
There are three exemptions to the general restriction on the promotion of investments under Article 48 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”), being:
- Certified High Net Worth individuals; and
- Those who are or self-certify themselves sophisticated investors;
- The content of the promotion is approved by an authorised firm.
High Net Worth Individuals
Promotions to High Net Worth individuals is permitted under Article 48 FPO as High Net Worth individuals are considered to be of sufficient means to undertake investment risks. The definition of High Net Work for the purposes of Article 48 FPO were originally set at a yearly gross income of not less than £100,000.00 and net assets of not less than £250,000.00
Self-Certified Sophisticated Investors
Individuals are able to self-certify that they are sophisticated investors and, as such, promotions for investments may be made to them. To self-certify as a sophisticated investor, the individual must certify that one of the following statements is correct:
- They are a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date of the certificate;
- They are working, or have worked in the two years prior to the date of certification, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
- They have made more than one investment in an unlisted company in the two years prior to the date of the certificate; or
- They are, or have been in the two years prior to the date of the certificate, a director of a company with an annual turnover of at least £1 million.
The reason for this exemption was to enable small businesses and entrepreneurs to access private equity and angel investment for their businesses to facilitate growth.
Changes coming into force on January 31 2024
From the 31 January 2024 the following changes will come into force:
High Net Worth Exemption
To account for inflation the minimum gross income to be considered to be a High Net Worth individual will rise from £100,000 to £170,000 whereas thenet asset test rises from £250,000 to £430,000. Those who this applies to will in future be called High Net Worth Investors and will no longer referred to as “Certified High Net Worth Investors”.
Additional changes revolve around the Form within which the HNW statement is made. There is now to be a tick box for income or assets exceeding the net minimum of which the Investor uses to provide an approximate actual income or asset value. There is no need for this evidence to be corroborated but the intention is to make signatories warier and take more thought before providing the information. It is likely, however, that many firms such as SSAS Professional Trustees, will go the extra step requiring corroboration from High Net Worth individuals.
The form now also clarifies that the income does not include one-off receipts and further confirms that the “net” assets must have associated liabilities deducted or discounted – such as mortgages, or development costs for example.
Self Certified Sophisticated Investors Exemption
The main change for Self Certified Sophisticated Investors are:
- The removal of the statement that the individual has made more than one investment in an unlisted company in the two years prior to the date of the certificate. This will no longer be able to be relied upon for self certification; and
- The statement that they are, or have been in the two years prior to the date of the certificate, a director of a company with an annual turnover of at least £1 million has been amended to £1.6 million.
Changes for Promoters
There are changes that promoters of investments must also comply with:
- Companies will be required to provide identification details in any communications using the exemptions;
- The statements required by High Net Worth individuals or those self-certifying as sophisticated investors will require those individuals to identify which criterion they meet to satisfy the exemption and explain how they meet the relevant criteria.
Where a regulated firm approves and/or makes content for financial promotion prior to the new compliance date which has been communicated with current FPO exemptions, the firm will not be required to request an updated investor statement and can continue to engage with investor after that date in relation to the old financial promotion rules.
What’s the Potential Impact on SSAS Professional Trustees and Members?
We spoke with Samantha Hayward at Sestini & Co Pension Trustees to find out how the changes to the promotion and investment exemptions would impact on Sestini & Co and their members.
From SSAS point of view what are the main challenges brought about by the changes to the promotion and investment regime?
Sam: The main challenge we are seeing as Professional Trustee, is around the removal of the criteria for a person to be seen as a sophisticated investor to have more than one investment in an unlisted company in the last 2 years prior to certification. As a SSAS is not an FCA regulated product, it is common to have Member Trustees opt to invest small sums in non regulated, esoteric style investments, in addition to say, a commercial property. Going forwards, unless these Member Trustees hold significant assets, or have reoccurring NET income of £170,000 or more, they will not be in a position to invest further funds.
Are there any nuances you foresee that relate specifically to the structure of SSAS?
Sam: Yes, something that SSAS Members, and investment providers can often overlook, is that a SSAS making an investment can have several Members. Until now, where a 3 Member scheme may have 3 members that could be considered ‘Sophisticated’, owing to having made 2 or more investments in unregulated funds in the recent past, going forwards, unless all scheme Members meet the new criteria, none of the scheme funds can be invested in unregulated products.
What changes can your members expect to see from you and other Professional Trustees following these changes? Do you think Professional Trustees will become more hawkish in respect of the investments members are making?
Sam: I think this very much depends on the Professonal Trustee firm. Much in the same way as some of the HMRC Pensions Tax Manual content is interpreted differently by SSAS Trustees, firms will take their own approach to how best to navigate the changes. Speaking with other Professional Trustee firms though, the general consensus is that the changes will allow for greater protection for individuals who may otherwise be exposed to unsuitable investments, both inside and outside the pensions space, which, in spite of the challenges faced by multi member schemes noted above, is seen as a positive change.
What additional measures are Sestini & Co Pension Trustees putting in place to both ensure compliance?
Sam: We’re contacting all of our Member Trustees that currently utilise the FSMA exemptions for scheme investments, to let them know that if they wish to invest further scheme funds in a new investment from 31st January 2024, the rules are changing, and to inform them of the new operating parameters. We’re also asking them to confirm whether they will remain as HNW / Sophisticated following the change, and, if so, to provide us with confirmation of this before any further investments are made.
Overall, do you think this is a good thing for Professional Trustees and members?
Sam: Absolutely. The current parameters have remained static for some time, meaning that there is a considerable portion of homeowners who are considered to be High Net Worth based on the value of their mortgage free homes. We’ve seen a huge increase in unregulated investments in the last 10 years, which have resulted in these homeowners pension pots being exploited, and lost. Anything that can be done to help stem losses is worth exploring.
