Navigating Section 21 FSMA: What You Need to Know

The Financial Services and Markets Act 2000 (FSMA) is what underpins financial promotions in the UK. Section 21 is considered crucial as it restricts unauthorised persons from issuing financial promotions, which, as we will discover, can be a danger to potential customers. Understanding Section 21 is therefore necessary to remain compliant, keep customers safe and avoid severe penalties.

Overview of Section 21 FSMA 

Section 21 of the FSMA prohibits unauthorised persons from making financial promotions… Unless approved by an authorised person. 

The financial promotions regime includes any communications that invite someone towards an investment activity. The regulation aims to protect consumers from misleading or harmful financial promotions. This may include a broader range of communications than you imagine it to, given that social media has become so accessible yet influential.

The scope of Section 21 extends to any inducement, communicated in the course of business, to engage in investment activity. This includes advertisements, brochures, websites, and in 2024, social media posts. The FSMA is what allows the Treasury to specify what constitutes acting in the course of business as well as creating exemptions for certain communications. 

Section 21 is therefore becoming increasingly important in keeping integrity within our markets by adding a layer of authorisation. This is in the hopes of safeguarding misinformation and even outright fraud.

Regulation of Financial Promotions 

The Financial Conduct Authority (FCA) oversees the enforcement of these rules, with a stipulation that promotions should be clear, fair, and not misleading.

A communication is classified as a financial promotion if it meets these criteria: it is made in the course of business, it invites someone to engage in investment activity, and it targets an audience capable of responding to the promotion. This is vague enough to therefore include even casual mentions in business settings.

Financial promotions cover a wide range of media, particularly in the digital world of social media, but also face-to-face communications. For instance, Tweets are a relatively obvious one that must comply with Section 21 if it induces viewers to invest, but so might be a Webinar or infographic. Similarly, an email newsletter detailing the benefits of a financial product falls under this regulation.

Requirements for Compliance 

Financial promotions compliance as per Section 21 requires that all financial promotions are either issued by an authorised person or approved by one. Authorised persons are entities that are regulated by the FCA, such as banks and investment firms, but the title can be extended to individuals.

To comply, firms should seek

1. Approval: obtain approval from an authorised person for any financial promotion. This involves thorough review and due diligence to ensure the content is accurate and not misleading.

2. Clear Communication: ensure all communications are “clear, fair, and not misleading”. Avoid technical jargon that could confuse the audience, and avoid small or poorly coloured fonts.

3. Regular Training: provide regular training for staff on compliance requirements and updates to regulations.

4. Monitoring: continuously monitor financial promotions to ensure ongoing compliance. This includes reviewing new communications and updating existing ones as needed.

5. Record-keeping: maintain records of all financial promotions and approvals. This helps demonstrate compliance in case of an FCA review.

Penalties for Non-compliance 

Unsurprisingly, non-compliance with Section 21 FSMA carries severe penalties. These can include fines, imprisonment and enforcement actions by the FCA. The severity of the penalty often depends on the nature and impact of the breach, but don’t rely on intuition—you can see past charges for yourself to get an idea.

For instance, unauthorised persons issuing financial promotions may face criminal charges, resulting in up to two years of imprisonment. Any agreements made through non-compliant promotions may be deemed unenforceable, exposing the firm to further legal and financial risks.

The FCA also has the authority to take disciplinary action against firms that issue misleading or inaccurate promotions. This can include banning certain financial promotions, imposing fines, and publishing details of the infringement to warn and protect consumers.

Firms must take compliance seriously to not only avoid these penalties but to build up trust within the industry and market.

Practical Tips for Compliance 

Ensuring compliance with Section 21 FSMA requires a proactive approach. Here are some tips

1. Develop Clear Policies: establish clear internal policies for creating and approving financial promotions. These policies should align with FCA guidelines, be easily accessible to all staff, and be as simple and actionable as possible.

2. Regular Training: conduct regular training sessions for employees involved in marketing and communications. Ensure they understand the requirements of Section 21 and the importance of compliance.

3. Use Compliance Tools: utilise compliance tools and software to review and monitor financial promotions. These tools can help identify potential issues before they reach the public.

4. Engage Compliance Experts: consider hiring compliance experts or consultants to review your processes and promotions. They provide valuable insights from a different perspective to help ensure your practices meet regulatory standards.

5. Monitor Changes in Regulations: stay informed about updates to FSMA and FCA guidelines. Regularly review and adjust your policies and practices to remain compliant with the latest regulations.

6. Maintain Documentation: keep detailed records of all financial promotions and their approvals. Continuously export data from social media platforms, for example, as this documentation is needed for demonstrating compliance during investigations.

Conclusion 

Adhering to Section 21 FSMA is everything for maintaining the integrity of your promotions. It protects customers and protects your reputation. By following compliance guidelines, firms can avoid penalties and contribute to a trustworthy financial market. Overseas funds distributing into the UK will require a UK authorised entity to approve their promotions. Selecting a knowledgeable and experienced approver will accelerate successful distribution in the UK, ensuring regulatory compliance and meeting expectations of UK distributors, like platforms and advisers.