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.
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