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
The Parliamentary Secretary, HM Treasury () (Con)
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.
5.15pm
(LD)
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.
(Lab)
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, . 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?
(Con)
I am grateful to both noble Lords for their contributions to this
short debate. The noble Lord, , 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,
.
I only partially agree with the charge made by the noble Lord,
, 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, , 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, , 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.
Financial Services and Markets Act 2023 (Consequential
Amendments) Regulations 2023
Considered in Grand Committee
5.25pm
Moved by
That the Grand Committee do consider the Financial Services and
Markets Act 2023 (Consequential Amendments) Regulations 2023.
The Parliamentary Secretary, HM Treasury () (Con)
My Lords, these two instruments make updates to financial
services regulation to ensure that it remains effective following
the passage of the Financial Services and Markets Act 2023, which
I will refer to as FSMA 2023.
The Financial Services and Markets Act 2023 (Benchmarks and
Capital Requirements) (Amendment) Regulations 2023 make two
targeted changes to financial services retained EU law or REUL.
FSMA 2023 repeals REUL in financial services, allowing the
Government to deliver a smarter regulatory framework for the UK
with regulation designed specifically for UK markets and
consumers.
The repeal of each individual piece of REUL will be commenced
once the Government and the regulators have made appropriate
arrangements to replace it with UK rules or determined that no
replacement is needed. Until financial services REUL has been
fully replaced, FSMA 2023 ensures that it can be kept up to date
through a power to modify REUL before its repeal takes
effect.
The first change made by the instrument reintroduces a discount
factor into the UK Capital Requirements Regulations. The discount
factor reduces the amount of capital that small and medium-sized
financial services firms are required to hold for certain
derivatives activity.
The Secondary Legislation Scrutiny Committee raised this SI as an
instrument of interest, noting the timeline of the original
removal of the discount factor from UK legislation and the
Government’s policy on mirroring changes in EU law. The
Government removed the discount factor in April 2021 through the
Financial Services Act 2021. The EU also removed the discount
factor from its version of the Capital Requirements Regulations
at that stage before reintroducing it later that year. The
Government do not have a policy of mirroring EU law and, through
the smarter regulatory framework, will tailor regulation to the
UK. After industry raised concerns with the Government about the
removal of the discount factor, we acted swiftly to reinstate it
through this instrument. This will provide certainty to firms and
align regulation to best practice globally.
The instrument also amends Article 51(5) of the benchmarks
regulation to extend the transitional period for the
third-country benchmarks regime to the end of 2030. Thanks to the
transitional period currently in effect, UK users of benchmarks
have access to non-UK benchmarks. The third-country regime, once
it takes effect, would require administrators of those benchmarks
to pass through one of the three access routes—equivalence,
recognition or endorsement—for UK users to rely on them. There is
a variety of issues with the third-country regime as originally
drafted in the EU. For example, some third-country benchmarks are
provided on a non-commercial basis, and administrators may
therefore lack the economic incentives to come through these
access routes. If the transitional period were to end with the
third-country regime in its current form, many administrators may
be unable or unwilling to use this regime for continued UK market
access. Losing access to these third-country benchmarks could
undermine the UK’s position as the centre for global foreign
exchange and derivatives markets and have further repercussions
given the widespread use of third-country benchmarks by UK
firms.
This instrument therefore extends the transitional period from
the end of 2025 to the end of 2030. This extension will provide
time to review the UK’s third-country benchmarks regime and
implement any changes in time for industry to take the necessary
steps to comply with the regime before it comes into force.
The Secondary Legislation Scrutiny Committee asked about any
risks posed by this extension. Although extending the
transitional period entails some risk by allowing the continued
use of lower-quality third-country benchmarks in the UK, those
risks are outweighed by the risks that would arise from allowing
the transitional period to end with the third-country regime in
its current form. Risks arising from the use of third-country
benchmarks during the transitional period can be mitigated
through regulation in the home jurisdiction of those benchmarks
and through international co-operation for jurisdictions where
specific benchmarks regimes are not in place.
5.30pm
The second SI—the Financial Services and Markets Act 2023
(Consequential Amendments) Regulations 2023—makes a number of
consequential amendments arising from FSMA 2023. First, it makes
consequential changes that are needed as a result of the repeal
of a number of pieces of retained EU law. The repeals in question
will take effect at the end of the year. Secondly, it updates a
cross-reference in FSMA 2023 to align the Bank of England’s
reporting requirements with its remit and responsibilities.
Thirdly, it amends the Payment Card Interchange Fee Regulations
2015 to ensure that the Payment Systems Regulator effectively
co-operates with other regulators under a new direction power
provided by FSMA 2023. These are consequential changes that
ensure the continuing functioning of the statute book following
the passage of FSMA 2023.
Together, these SIs deliver important changes to ensure that the
financial services regulatory framework continues to function
effectively for consumers and businesses alike. I beg to
move.
(LD)
My Lords, we have no comment to make on the second statutory
instrument in this group, except to say that we agree with what
the Minister said during the debate in the Commons that for the
entirely consequential changes brought about by this instrument
“consequential” means “necessarily following on from” not “of
consequence”.
We support this instrument, but we have a little more to say
about the first. As a mathematician by education, I should start
by saying how pleased I was to see e—Euler’s number, the base of
natural logarithms —make an important appearance on page 2 of the
instrument, albeit without any explanation at all for the reader
of what it might mean. I think that may be rather odd.
The EM explains that the discount factor—a means of reducing the
amount of capital that small and medium-sized firms hold for
their trading and derivative activities—was removed in error from
the capital requirements regulation, both here and in the EU.
Reinstating it via this SI will help ensure that the UK remains
competitive with other jurisdictions. We entirely support this
remedial measure but note the SLSC’s comments about the matter.
The Minister has already mentioned some of them.
The question really is: how is it that the mistake, and it was a
mistake, was introduced into the UK after it had already been
corrected in the EU? Does this not suggest incompetence or, at
the very least, insufficient awareness of relevant activity in
key trading partners? What steps has the Treasury taken to
eliminate this kind of error?
We also support the extension of the transitional period for
third-country benchmark regimes for five years to 31 December
2030. As the Minister said, if we were to lose access to these
third-country benchmarks, it could weaken our position as a
centre for global FE and derivatives. This SI gives us six years
to sort out a new regime, as I believe the EU is also
contemplating.
How, when and with what do we intend to replace these
transitional arrangements? What steps are currently being taken
to make sure that we do indeed replace them, or are we content to
extend this supposedly transitional arrangement indefinitely? Are
we engaged in discussion with our EU counterparts over the
matter? The Treasury told the SLSC that the risks arising from
the extension of the transition period were “small, manageable
and temporary”. The Minister mentioned and addressed that issue,
but I would be grateful if she could expand on exactly what the
risks are, how they are manageable and why they are temporary.
Having said all that, I close by saying that we support this
SI.
(Lab)
My Lords, overall, we agree with these regulations. When the
first of these two grouped SIs was debated in the House of
Commons, my honourable friend , the shadow Economic
Secretary, posed two questions to the Minister. Unfortunately, he
did not address either of them in his response, so I will ask
them again today. Of course, the noble Baroness is welcome to
write with an answer, if that is preferable.
The two questions are on changes to capital requirements. First,
given that the Prudential Regulation Authority is proposing to
remove the SME supporting factor when it confirms its final rule,
are the Government not reintroducing a measure that the PRA plans
subsequently to abolish? Secondly, if the PRA goes ahead with its
plan, what reassurance can the Government provide that the UK’s
SME lending market will not be left at a significant competitive
disadvantage against its European counterparts due to the
increased cost of capital?
The noble Lord, , asked about the
reintroduction of a discount factor, which was mentioned by the
Minister in her opening remarks. I note that the discount factor
was previously “unintentionally” removed from the relevant
regulation in both the UK and the EU. I also note that the
discount factor was removed from UK law in January 2022, and that
this was identified as an issue only 18 months later, in July
2023. However, apparently, the factor was reinstated by the EU
into its own laws four months prior to it being unintentionally
removed from UK law back in September 2021. As the noble Lord,
, observed, it is odd that a
mistake was introduced in the UK after it had already been
corrected in the EU. The Minister is clearly correct to note that
the UK does not mirror changes to EU law post Brexit, but does
she think that keeping up to date with developments in the EU,
where parallel measures remain part of UK legislation, could help
to ensure that avoidable errors such as this do not occur?
(Con)
Once again, I am grateful to both noble Lords for their
contributions to this short debate. I will write further on what
the noble Lord, , said about the formula—it is
not that complicated; I am an engineer by training, and it is not
beyond the wit of man to understand this. But we might provide a
little more explanation in due course.
I am not sure I can say much more about the timing of the removal
and reintroduction of the discount factor. It is not a
particularly widely used element within the system, and therefore
the industry took a while to notice that the change had happened.
Obviously, there are lessons to be learned in these
circumstances, and we moved to reintroduce it as quickly as we
could. Of course, the regulators are well aware of what happened.
I am grateful to noble Lords that we are able to get it back on
to the statute book today.
That brings me on to the various discussions we have with the EU,
as close trading partners. The noble Lord, , asked what changes will be
next. There will be potential changes to the third-country
benchmarks regime, but that is in the context of much wider
changes within the smarter regulatory framework, so the repeal of
each piece of retained EU law will be commenced once appropriate
arrangements are in place with the UK rules—or, as I said in my
opening remarks, when the Treasury has determined that no
replacement is needed. Alongside that, we are delivering our
smarter regulatory framework in order to replace retained EU law
as necessary.
It will be a carefully planned and phased approach. We believe
that we have given ourselves sufficient breathing room by making
the transitional period last until 2030. It may be that we need
all that time, or it may not, but we want to make sure that it
fits into the wider reform of the programme to ensure that we
prioritise those things that we feel are needed first in order to
benefit our very successful financial services sector. Of course,
we continue to have enduring and sensible dialogue and
co-operation with other jurisdictions, including the EU. For
example, on 19 October, the Treasury hosted the first joint EU-UK
financial regulatory forum, which welcomed participants from not
only the European Commission but UK and EU regulators to discuss
common issues. It is clear that the UK and the EU regulatory
frameworks will change over time and ultimately remain the
autonomous concern of the respective parties, but it is also
important that we discuss changes for the benefit of sharing our
understanding.
The noble Lord, , asked about the risks from
the benchmark extensions. It should be noted that systemically
used benchmarks pose the greatest risk. These benchmarks are
subject to UK benchmark regulation because they are administered
in the UK. They might be subject to another jurisdiction’s
benchmark regime or be created by a third country’s central bank.
That also means that there are some benchmarks that do not fall
into those categories—these are possibly the lesser-used ones.
But it is the case that UK benchmark regulation places additional
requirements on the users of benchmarks that continue to apply
where they use third-country and domestic benchmarks. These
requirements include, for example, robust fallback provisions in
the contract should the benchmark become unavailable for whatever
reason, or fail—so there are protections there. As I noted in my
opening remarks, we recognise the risks and also the benefits
that those benchmarks have in underpinning a very significant
part of our financial services sector.
The noble Lord, , asked about the questions
raised by his colleague in the other place. I will write with
more information. I have lines here on the Prudential Regulatory
Authority, Basel III et cetera, but his question deserves a
fuller answer about how we see this transitioning into that
regime.
Motion agreed.
Financial Services and Markets Act 2023 (Benchmarks and Capital
Requirements) (Amendment) Regulations 2023
Considered in Grand Committee
5.43pm
Moved by
That the Grand Committee do consider the Financial Services and
Markets Act 2023 (Benchmarks and Capital Requirements)
(Amendment) Regulations 2023.
Relevant document: 3rd Report from the Secondary Legislation
Scrutiny Committee
Motion agreed.
