British Red Tape To Increase Cost Of UK Financial Promotions/Products

In its new Financial Services Bill (explanatory notes here) the UK government proposes a new bottleneck 'regulatory gateway' for the approval of financial promotions that must raise the cost of affected financial products and services.

A "financial promotion" is basically any communication that contains an invitation or inducement to engage in a financial product or service. These could be ads in any media; marketing brochures; direct mail; or social media posts. 

The advertiser could be either a firm authorised by the Financial Conduct Authority or the Prudential Regulatory Authority, or a firm that is unauthorised. 

Where the intending advertiser is unauthorised, existing UK regulation requires that firm to have the financial promotion approved by any firm that is authorised by the FCA or the PRA (unless the promotion is otherwise subject to an exemption).  

There is no specific suitability test that authorised firms must meet to be able to approve promotions for unauthorised firms; and they are not required to notify the FCA when they are approving the financial promotions for unauthorised firms. But it is a criminal offence for an unauthorised firm to communicate a financial promotion that isn't either approved by an authorised firm or exempt; and any resulting contract is unenforceable against the customer. In addition, authorised firms have a responsibility to ensure that any financial promotions they approve are compliant with relevant promotional rules, so they would be foolish to approve a financial promotion in an area in which they have insufficient expertise; or without undertaking sufficient due diligence. The FCA has issued guidance on approving financial promotions and they are also advertising standards codes supervised by the Advertising Standards Authority.

Yet, the FCA claims that it often only becomes aware of a product being promoted by an unauthorised firm after it has caused harm, as happened with unlisted debt securities or 'mini-bonds', for example. 

To address this problem, the Financial Services Bill establishes a regulatory ”gateway” through which authorised firms must obtain the FCA's permission before being able to approve the financial promotions of unauthorised firms. The FCA will be able to judge each firm's suitability and limit the types of promotions firms will be able to approve. An authorised firm will only be able to approve a financial promotion within the scope of a permission granted by the FCA or within an exemption.

The notes to the Bill already state that this will reduce the number of authorised firms that are able to undertake such approvals. But it omits to point out that the process by which authorised firms must demonstrate that they meet the FCA's authorisation and suitability requirements must also raise the cost of granting approvals. Constraining both the number of available firms and raising their administrative costs must in turn raise their fees for approving financial promotions, and ultimately raise the cost of the financial product or service being advertised, unless the authorising firms simply bake this cost into their general overhead. But even if these costs are restricted to approvals for unauthorised firms, we cannot foresee what new types of products might be adversely impacted by these constraints/costs in the future; and/or the FCA may well stifle innovation, as has been alleged in relation to what it has wrongly labelled 'high risk investments'. with new rules recently announced here.