Legal update The marketing of investments and financial services in and from the UK: The new regime

Received (in revised form): 18th June, 2002

William Yonge
is a Senior Associate at Dechert Solicitors who, after being called to the Bar in 1999, was employed as an in-house lawyer at IMRO and the Securities and Investment Board (now the Financial Services Authority). He has advised on fund management, corporate nance and capital adequacy issues, the establishing of start-up investment management and corporate nance rms, structuring UCITS funds and hedge funds and the marketing of regulated and unregulated funds in the UK and internationally. He has also closely followed the implication of the new regulatory regime under the Financial Services and Markets Act 2000 and advises on this area. He became dually qualied as a solicitor in 1999, is a member of the Securities Institute, and has written articles on fund structuring, nancial promotion and regulatory issues. He is a principal contributor to the Encyclopaedia of Forms and Precedents, Financial Services (Fifth Edition, 2002 Re-issue) published by Butterworths.

INTRODUCTION The nancial services industry in the UK is regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA 2000). The industry breaks down, broadly, as follows: banks, building societies, credit unions, friendly societies, investment businesses and insurers. Investment businesses include: asset managers, broker dealers, corporate nanciers, independent nancial advisers, life oces and their marketing networks. Persons carrying on nancial services business in the UK will generally need to be authorised by the FSA to carry on the relevant regulated activity or activities. In December 2001 the Economic Secretary to the Treasury, Ruth Kelly, announced that mortgage lending businesses, including advising on and arranging mortgages, were scheduled to be brought into the regulatory net for the rst time in the second quarter of 2004. Alongside this, the FSA will be given power to regulate the sale of general insurance products. FSMA 2000 also addresses the marketing

William Yonge Dechert Solicitors, 2 Serjeants Inn, London EC4Y 1LT, UK Tel: +44 (0)20 7583 5353; Fax: +44 (0)20 7583 3683; e-mail: william.yonge@eu. dechert.com

of investments (including deposits) and nancial services (nancial promotion) by persons who are not authorised by the FSA. This regime is an overlay on the regulation of marketing, whatever the nature of the service, by, for example, the codes issued by the Advertising Standards Authority; the Independent Television Commission and the Radio Authority; and the Telecommunications (Data Protection and Primary) Regulations 1999. There is a need for an additional regime on the grounds that nancial promotion can lead consumers into making signicant, long-term and possibly risky investments. FSMA 2000 sought to update and modernise the predecessor legislation applying to nancial promotions in the UK consolidating the three main predecessor legislative regimes governing the marketing of deposits, insurance and investments (the Insurance Companies Act 1987, the Financial Services Act 1986 [the 1986 Act] and the Banking Act 1987). In drafting the legislation the government was keen to ensure it reected the growing use of the Internet and other

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developing forms of technology in the nancial services marketplace. In short, the government wanted to produce legislation which was media-neutral and would not, therefore, become dated by further advances in communications technology. Persons who are not authorised by the FSA are subject to the restriction on nancial promotion set out in Section 21 of FSMA 2000 (the Restriction). It is important to appreciate that a person may become involved in nancial promotion without requiring to be authorised by the FSA to conduct regulated business in the UK. For example, companies seeking to raise capital do not require to be authorised by the FSA to do so; journalists may wish to write about specic nancial products to enable their readers to make more informed decisions; persons who are exempt from the need for authorisation (eg appointed representatives of authorised persons); persons who have structured their nancial business in reliance on an exclusion so as to avoid the requirement to be authorised; and persons who are based outside the UK and therefore do not require to be authorised by the FSA but nonetheless wish to promote investments or services in the UK marketplace (eg an overseas nancial services provider or investment fund). Also, nancial promotion may take place prior to the conduct of any regulated activity. For example, under FSMA 2000 oering to conduct a regulated activity is not itself a regulated activity (in contrast to the predecessor legislation). Section 21(1) of FSMA 2000 contains the Restriction, the eect of which is that an unauthorised person must not, in the course of business, communicate or cause to be communicated an invitation or inducement to engage in investment activity unless either the content of the communication is approved by an authorised person or the communication benets from an exemption made by the

Treasury under FSMA 2000. The term nancial promotion is the shorthand used to describe the communication of an invitation or inducement to engage in investment activity. It is a criminal oence to breach the Restriction, punishable by a maximum of two years imprisonment and an unlimited ne. In a commercial context, when customers enter into an agreement or exercise any rights as a result of a nancial promotion made in breach of the Restriction, the agreement will be unenforceable against them. Customers will be entitled to recover any property transferred and to receive compensation for losses incurred but if they choose to recover property transferred or not to continue the contract, they must return any money received. The courts are given a residual jurisdiction to enforce agreements made in contravention of the Restriction if satised that this will be just and equitable in the circumstances. Since authorised persons who communicate or approve nancial promotions are not subject to the Restriction, the FSA regulates the communication and approval of nancial promotions by authorised persons (see Chapter 3 of the Conduct of Business Sourcebook [COB 3] of the FSA Handbook of rules and guidance [the FSA Handbook]). The FSA, however, is not allowed to make rules regulating nancial promotions by authorised persons which could have been made lawfully by an unauthorised person relying on the exemptions. This ensures a level playing eld for the authorised and unauthorised community. COB 3 exempts such nancial promotions from the requirements that would otherwise apply. The exemptions from the Restriction are made by the Treasury in secondary legislation issued under the authority of FSMA 2000. The Treasury to date, 1st June, 2002, has made the following

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statutory instruments on, or including provision about, nancial promotion by unauthorised persons: the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001 the Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2001 the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment No. 2) Order 2001 the Financial Services and Markets Act 2000 (Financial Promotion and Miscellaneous Amendments) Order 2002 the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002. This paper refers to these six orders as the Order. In addition, the FSA issued guidance, which does not bind the courts, on its views on the application of the nancial promotion regime in its Financial Promotion Guidance Instrument 2002 which came into force on 1st June, 2002. The guidance is also published as Appendix 1 to the Authorisation Manual of the FSA Handbook. This paper draws on that guidance to explain the legislation and comprises the following sections: Key concepts: addresses the ve key concepts which underpin the Restriction. Each of these concepts needs to be considered carefully in determining whether the nancial promotion regime applies. Additional concepts in the Order: the Order contains two sets of concepts which do not appear in the Restriction, the rst set containing made to, directed at and recipient and the

second set containing real time, nonreal time, solicited and unsolicited nancial promotions. A proper understanding of these concepts is required in order to determine whether, and if so, which of the exemptions in the Order can be relied on. The Exemptions: describes some of the more important exemptions in the Order. Financial promotion decision tree: this is a useful tool for determining whether a nancial promotion by an unauthorised person will require approval by an authorised person and, in the case of a nancial promotion by an authorised person, whether COB 3 will apply. The regulation of nancial promotions by authorised persons: while the Restriction will not apply where an authorised person makes a nancial promotion, the FSAs rules governing nancial promotions by authorised persons, COB 3, will apply. This section summarises the standards set by FSA in this regard. Conclusion.

KEY CONCEPTS In order to understand the Restriction properly the following key concepts have to be considered: invitation or inducement in the course of business communicate engage in investment activity having an eect in the United Kingdom.

Invitation or inducement FSMA 2000 does not dene the terms invitation or inducement. An invitation to engage in an investment activity will typically involve a communication which

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invites a person to enter or oer to enter into an investment agreement, for example a prospectus which includes an application form or an Internet promotion which invites the visitor to register and purchase ISAs online. An invitation will also include an invitation to treat such as an advertisement which invites potential counterparties to contact the promoter with a view to making it an oer to do business. The FSA considers that merely asking a person if they wish to enter into an agreement with no element of persuasion or incitement will not be an invitation. During the consultation process on the draft legislation there was a concern that the use of the term inducement would mean the Restriction could cover inducements without any promotional intent. The Treasury responded stating its intention that only communications containing a degree of incitement would amount to inducements and that communications comprising purely factual information would not do so provided the facts were presented in such a way that they did not also amount to an invitation or inducement. In Parliament during the legislative passage of FSMA 2000 the Minister conrmed that the governments policy was to capture promotional communications only stating that the Restriction would not apply to, for example, public announcements, exchange of draft share purchase agreements in corporate nance transactions or cases in which the recipient of a communication simply misunderstands its contents and engages in investment activity as a result. The FSA considers the essential elements of an invitation or inducement are that it must both have the purpose or intent of leading a person to engage in investment activity and be promotional in nature. Examples of communications not containing the requisite promotional element would include those which seek

merely to inform or educate about the mechanics or risks of investments. The FSA considers an inducement to be a form of communication which in itself does not amount to an invitation, but which is a link in a chain where the chain is intended to lead ultimately to an agreement to engage in an investment activity. Only those links which are a signicant step in persuading or inciting or seeking to persuade or incite a recipient to engage in investment activity, or seeking to do so, will be inducements. For example, a promotion which merely holds out a person as providing services in investment management, corporate nance, or life insurance will not be an inducement to engage in investment activity but to ask for further information about those services. The provision of that further information may well constitute either an invitation or inducement to engage in investment activity. The FSA helpfully states that the inclusion of contact details should not in itself determine whether the item in which they appear is an invitation or inducement, but they are a factor which should be taken into account. Some of FSAs examples of invitations and inducements are given in Table 1. In the course of business Under FSMA 2000 the Treasury has power to specify circumstances in which a person is viewed as acting in the course of business for the purposes of the Restriction. Until the Treasury does so, the term will bear its ordinary and natural meaning. The purpose here is to regulate people promoting investments or investment services in the course of their business, whether or not such services are carried on as a business. So, an employer who distributes a leaet promoting a group pension scheme to its employees will be communicating a nancial

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Table 1 Examples of invitations and inducements Example Directory listings Description Telephone directory entries which merely list names and contact details (for example, grouped under a heading such as stockbrokers) will not be inducements. These are announcements of past achievements intended to create awareness and general future business. They are typically directed at the authorised community and other investment professionals although they can appear in publications with a wide and general circulation such as the business pages of a broadsheet newspaper. The FSA consider these will not be inducements if they merely state past achievements and contain no contact details. In cases of doubt it may be sensible to rely on the exemption in the Order for promotions to investment professionals. Links which are activated merely by clicking on a name or logo will not be inducements. Links which are accompanied by or included within a narrative on or referred to in the site may be inducements depending on the extent to which they may seek to persuade or incite persons to use the links. Where a link does constitute an inducement, if it does not identify any particular person as a provider of an investment or a supplier of an investment activity, the exemption for generic promotions in the Order may be relevant. These are almost bound to be inducements.

Tombstone advertisements

Links to a website

Banner advertisements on a website Publication or broadcast of prices of investments (historic or live)

These may or may not involve invitations or inducements. Where a person such as a newspaper publisher, broadcaster or a data supplier merely presents prices of investments the information can be purely factual and not be an inducement. Historic prices on their own will never be invitations or inducements. However, electronic trading systems displaying firm prices on the screen may be an invitation and those displaying indicative prices an inducement. These will typically be made in company reports or accounts or at a presentational roadshow. Statements of fact about a companys performance or activities will not, themselves, be inducements to engage in investment activity. Statements which speculate about a companys performance or share price may be intended to encourage investors to act and may be inducements. Editorial (which may be in response to a press release) may recommend readers to consider buying or selling a type of investment, for example, an ISA fund investing in a particular region, or to obtain investment services, for example, financial planning advice. If so, the editorial will be an inducement. Editorial comprising an objective assessment of an investment, its issuer or an investment firm without any encouragement to invest or obtain any services will not be an inducement. In any event, the Order contains a specific exemption for promotions by journalists. The exemptions for generic promotions in the Order may also be useful. League tables showing the past performance of investment products of a particular kind or investment firms of a particular class (eg investment managers) and determined by the application of pre-set criteria will not, in themselves, be inducements. However, if the tables are presented so as to contain an actual or implied recommendation that a particular investments performance suggests it is a potential buy or sell they may become inducements. These types of agreements will only rarely be inducements or invitations. An agreement whether in draft or final version will be usually be seen as a document setting out the terms and conditions of a deal but not itself be an inducement (or an invitation to deal). However, an agreement or draft agreement may be accompanied by an invitation or inducement such as a covering letter or an oral communication that seeks to persuade or incite a person to enter into the agreement. There are circumstances in which the agreement in itself may include an invitation or inducement, for example, an advertisement that contains the terms and conditions and the means to enter into it as a binding contract, for example, a prospectus with an application form included. Companies will often seek to raise their profile in a general manner, for example by sponsoring sporting events or simply putting their name or logo on the side of a bus. The FSA refers to such advertisements as image advertisements and in the case of investment businesses image advertisements may include, along with the name or logo, a reference to the type of investment business it conducts and the telephone or fax number. In the FSAs view profile raising activities of this kind may involve an inducement to contact the advertiser, but will be too far removed from any possible investment activity to be considered to be an inducement to engage in investment activity. Professional advisers will often be called on to explain the terms of an agreement or the consequence of taking a particular course of action and will often be able to do so in a way which uses merely factual information. In the FSAs view even if the explanation presents the investments in a good light or otherwise influences the recipient it will not be enough to make it an inducement. However, in cases of doubt if such communications do amount to a financial promotion they may in practice fall under one of the exemptions for one-off promotions in the Order.

Company statements, announcements and analyst briefings

Journalism

Performance tables

Investment agreements, share purchase agreements and customer agreements

Image advertising

Explanation of terms

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Table 1 Examples of invitations and inducements continued Example Enquiries about a persons status or intentions Description Prior to making a financial promotion it may be necessary to enquire about a persons status or intentions. For example, before relying on one of the exemptions in the Order which allows financial promotions to be made to certified high-net worth individuals or sophisticated investors it will be necessary to enquire whether the potential recipient of the financial promotion is eligible so that the promoter may determine whether he can rely on the exemption. Another example might be enquiries of a person to establish how he or she might propose to react to a takeover offer. The FSA takes the view that these are initial enquiries not amounting to a financial promotion in themselves even if accompanied by a brief statement of the reason why the enquiries are being made and a reference to the type of investment involved. Employers will often want to communicate information to their own employees on controlled investments such as personal pension schemes including stakeholder schemes and other employee benefit schemes. In other words employers may from time to time wish to communicate to their employees information relating to controlled investments (note that interests under an occupational pension scheme are not controlled investments). Communications which are merely intended to educate or give employees information with no element of persuasion or incitement will not be invitations or inducements. However, if any such communications seek to persuade or incite employees to do things such as participate in or leave a pension or other benefit scheme or exercise certain rights under such a scheme, for example making additional contributions, those communications will be financial promotions. There is, however, a useful exemption in the Order for employee share schemes, which is likely to apply to any financial promotions made by employers or members of their group. Furthermore, in relation to an employers promotion of company health or general insurance benefit packages there are also relevant exemptions in the Order. Finally, employers wishing to communicate to their employees details about stakeholder pension schemes should be able to rely on an exemption in the Order relating to promotions required or authorised by enactments. In the case of stakeholder pension schemes employers will be making the promotion in order to meet their obligations under the Welfare Reform and Pensions Act 1999 to offer their employees a stakeholder pension scheme.

Communications by employers to their employees

promotion even though it is neither in the business of making nancial promotions or managing pension assets. The FSA considers that in the course of business requires a direct or indirect commercial interest on the part of the communicator; and that genuine nonbusiness communications, for example friends talking socially, letters between family members or communications by individuals using an Internet bulletin board for personal reasons will not be restricted. The FSA gives some useful guidance on capital raising for small private companies. Where a company is already in operation, it will be acting in the course of business when seeking to generate additional share or loan capital. At the pre-formation stage, individuals who are proposing to run the company will typically approach a small number of friends, relatives and acquaintances for start-up capital. The FSA considers that such individuals will not be acting in the course of business during the pre-formation stage of a small private company.

Communicate Under FSMA 2000 the word communicate includes causing a communication to be made, which means that a person who causes another person to communicate a nancial promotion is subject to the Restriction. This seems to encompass the activities of giving material to another person and transmitting material on behalf of another person. The FSA considers that primary responsibility for a nancial promotion will rest with the person responsible for its contents, the originator. Where a person other than the originator transmits a nancial promotion on the originators behalf the transmitter is communicating it and the originator is causing its communication. Persons who communicate or cause a communication will include: the originator; publishers and broadcasters who carry nancial promotions and websites carrying banner advertisements; and intermediaries who redistribute another persons nancial promotion.

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In all of the above examples, the communicator will normally be aware of the fact that it may be distributing nancial promotions. Those who provide services for facilitating the distribution of nancial promotions, however, will normally be unaware that they may be distributing nancial promotions or indierent to whether they are doing so or both. For example: postal services providers; telecommunication services providers; broadcasting services providers; couriers; leaet distributors; and newsagents. These types of distributor may not be communicating in the rst place so will not be subject to the Restriction without having to rely on an exemption. The Treasury has, however, usefully provided an exemption in the Order for this type of distributor referred to as mere conduits. What is the position of those persons in the marketing business who are aware that they are involved in nancial promotions, for example designers of nancial promotions, printers, persons responsible merely for placing marketing material originated by others and professional advisers who prepare material for clients or advise them on the need to communicate a nancial promotion? The FSA considers that none of the above persons will be communicating or causing to be communicated nancial promotions. Presumably, the justication of this view is that all of the above are merely helping the originator to produce its own nancial promotion. Engage in an investment activity The communication must be an invitation or inducement to engage in investment activity. This phrase is dened as follows: entering or oering to enter into an agreement the making or performance

of which by either party constitutes a controlled activity; or exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment. Controlled activity and controlled investment are dened in the Order (see Table 2). Broadly, controlled activities and controlled investments are similar to regulated activities and specied investments under the Regulated Activities Order as amended (which determines what types of business require authorisation under FSMA 2000) except that, in respect of controlled activities, none of the exclusions that are set out in that order apply. Therefore, it is possible for a person to be carrying on a business in the UK for which it does not require authorisation but who is caught by the Restriction when promoting the business. The FSA has usefully summarised the eect of the above stating that a nancial promotion must relate to a controlled investment and be: a communication, in the course of business, of an invitation or inducement to: acquire, dispose of or underwrite controlled investments or exercise rights conferred by such an investment for such purpose or for the purpose of converting it; or receive or undertake investment services such as dealing with investments, arranging, managing investments, advising on investments or safeguarding and administering investments. Having an effect in the United Kingdom On territorial scope generally, nancial promotions made or directed from the UK to another place in the UK are, of course, covered. In addition, the opportunity was taken by the draftsman

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Table 2 Controlled activities and investments Controlled activities (a) accepting deposits (b) effecting and carrying out contracts of insurance (c) dealing in securities and contractually based investments (d) arranging deals in investments Controlled investments (a) a deposit (b) rights under a contract of insurance

(c) stocks and shares (d) debentures, debenture stock, loan stock, bonds and certificates of deposit, by way of example (e) government and public securities (f) instruments giving entitlement to investments, eg warrants

(e) managing investments (f) safeguarding and administering investments (g) advising on investments

(g) certificates representing certain securities, for example American depositary receipts (ADRs), which are freely tradeable independently from the underlying securities which are held by the custodian bank (h) units in a collective investment scheme, for example units in a unit trust fund, shares in a corporate open-ended investment fund and interests in a private equity or property limited partnership fund (i) (j) rights under a stakeholder pension scheme options, futures and contracts for differences

(h) advising on syndicate participation at Lloyds

(i) providing funeral plan contracts (as of 1st January, 2002) (j) providing qualifying credit (as of a date to be announced, currently likely to be in the second quarter of 2004) (k) agreeing to carry on any of the above controlled activities bar (a) and (b)

(k) Lloyds syndicate capacity and syndicate membership

(l)

funeral plan contracts (as of 1st January, 2002)

(m) agreements for qualifying credit, broadly, mortgage contracts (as of a date to be announced, likely to be in the second quarter of 2004) (n) rights to or interests in investments (other than those at [m] above)

to address the position of promotions (a) made or directed from overseas to anywhere whether or not in the UK and (b) made or directed from the UK to overseas. FSMA 2000 states that in the case of a communication originating outside the UK, the Restriction applies only if it is capable of having an eect in the UK (whether or not it actually has such an eect). This means, for example that, subject to applicable exemptions, an e-mail sent by a US broker to a client in Switzerland advising them that shares in a specic UK company were worth an

investment will be a nancial promotion. The Order, however, contains an exemption for nancial promotions which are made to or directed only at overseas persons whether or not the nancial promotion is made from the UK. This exemption does not apply in respect of an unsolicited real-time communication such as a cold call unless the call is made in a place outside the UK and is made for the purposes of a business which is carried on entirely outside the UK. This exemption has recently been amended so that it does not apply in the context of outgoing electronic commerce

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communications. The Electronic Commerce Directive provides for the regulation of Information Society Services (ISS) on a country of origin basis. Member States are required to ensure that ISS providers established in their own territories comply with the relevant national legal requirements. Thus the Restriction will apply to such communications and the principal of home state regulation of ISS is sustained. ISS are electronic services for remuneration at the request of the recipient. ISS include online nancial services and online direct marketing and advertising. The Order has also been amended to provide an exemption for electronic commerce communications made from an establishment in a Member State other than the UK. The eect of this is that persons in other EEA states who wish to make electronic commerce communications in the UK or into the UK will not be subject to the Restriction. ADDITIONAL CONCEPTS IN THE ORDER The Order contains some additional concepts which need to be understood in order to apply the exemptions properly. The concepts of made to, directed at and recipient The Restriction states that nancial promotions are made. The Order indicates that nancial promotions are made by being addressed to a person and that nancial promotions may be addressed: to a particular person or persons whether verbally in legible form (for example, in a telephone call or a letter), in which case they are made to another person; or

to persons generally (for example, in a broadcast or on a website), in which case they are directed at persons. This is important because some exemptions in the Order apply only to nancial promotions that are made to persons. A website will normally be addressed to persons generally and accordingly directed at such persons. Websites may include a password-protected part in which, for example, unregulated funds are promoted. Although the position is not clear and the FSA has not given any guidance on the point, if visitors to the protected part are pre-screened prior to being allocated a password it is arguable that the content of the protected part is addressed to particular persons, ie those persons with a password. By contrast, some websites may choose to avoid a password registration procedure for a protected part of their website but nonetheless protect that part behind a disclaimer which will say, for example, that the disclaimed part of the site is aimed only at US investors. In these circumstances, although the content of the disclaimed part of the site might be exactly the same as it would be in a password-protected part any nancial promotions in the disclaimed part will only be directed at persons contemplated by the disclaimer. The Order denes a recipient of a nancial promotion as the person to whom the promotion is made, or, in the case of a non-real time communication directed at persons generally, any person who reads or hears the promotion. Real time, non-real time, solicited and unsolicited financial promotions The Order distinguishes between (a) real time and non-real time nancial promotions and (b) solicited and unsolicited real time nancial promotions

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and treats these types of nancial promotion dierently. A real time nancial promotion is dened as a nancial promotion made in the course of a personal visit, telephone conversation or other interactive dialogue. A non-real time nancial promotion is one that is not a real time nancial promotion. The Order provides certain indicators that a nancial promotion is a non-real time nancial promotion. These are that: the nancial promotion is made to or directed at more than one recipient in identical terms (save for details of the recipients identity) the nancial promotion is made or directed by way of a system which in the normal course constitutes or creates a record of the promotion, which is available to the recipient to refer to at a later time the nancial promotion is made by way of a system which in the normal course does not enable or require the recipient to respond to it immediately. The Order states that nancial promotions made by letter, e-mail or contained in a newspaper, journal, magazine or other periodical publication, a website, a television or radio programme are nonreal time nancial promotions. A telephone call (rather than a telephone conversation) may or may not be interactive. Telephone calls may be made to or by a machine which asks questions and records answers. The FSA does not consider that to be an interactive dialogue. The FSA does consider scripted calls from operators at call centres to be interactive on the basis that callers run through their scripts in a way determined by the answers given by the recipient. This area is likely to cause practical diculties at company AGMs and other types of formal meeting which involve a question and answer session with the

invited audience. The chairman of a plc at its AGM will often be asked questions from the audience. When such a person answers a question he or she may do so in a way that is either personal to the questioner or by addressing the audience in a way that precludes or does not call for any interaction. If the chairman and the questioner pursue a conversation the chairman may make a real time nancial promotion to that person whereas if he or she is careful to avoid any interaction, he or she may make or direct a non-real time nancial promotion to the audience. Broadly, a real time nancial promotion would appear to be one which enables interaction at the time it is made, for example personal visits, meetings, presentations and telephone conversations (although slides, hand-outs and other visual aids made available during a presentation, for example, will be non-real time communications). The FSA considers that a nancial promotion which may exist in enduring form will be a non-real time nancial promotion, for example all forms of written material, e-mails, videos, bulletin boards, websites, recorded telephone messages and messages placed on Internet chat rooms. Broadcasts (whether radio or television) or teletext services will usually be non-real time. The Order states that a real time nancial promotion is solicited where it is made in the course of a personal visit, telephone conversation or other interactive dialogue which was initiated by or takes place in response to an express request from the recipient. An unsolicited real time nancial promotion is any such promotion which is not solicited. Importantly, the Order claries that persons will not be treated as expressly requesting a call, visit or dialogue merely because they do not indicate that they do not wish to receive any or any further visits or calls or to engage in any or any further dialogue; or because they agree to

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standard terms that state that such visits, calls or dialogue will take place, unless they have signied clearly that, in addition to agreeing to the terms, they are willing for the visit, call or dialogue to take place. The Order also states that nancial promotions made during a visit, call or dialogue will be solicited only if they relate to controlled activities or controlled investments of the kind to which the

consumer envisaged that they would relate. This will help prevent sales representatives from digressing into unsolicited advice during a call or visit ostensibly for advice solicited by the consumer. THE EXEMPTIONS Some of the more important types of nancial promotion exempted from the Restriction are summarised in Tables 3

Table 3 Exemptions applying to all controlled activities (Part IV of the Order) Example Financial promotions to or directed at overseas recipients Generic promotions Description This exemption concerns financial promotions which are made to or directed only at overseas persons and is covered above under Having an effect in the United Kingdom.

The Restriction will not apply to (a) any financial promotion which does not identify (directly or indirectly) a person who provides the controlled investment to which the promotion relates; and (b) does not identify (directly or indirectly) any person who carries on a controlled activity in relation to that investment. So the exemption will apply to a financial promotion of a class of product made by persons who are not themselves carrying on a controlled activity. For example this exemption would be likely to apply to campaigns such as the its investment trusts awareness campaign in 19992001 by the Association of Investment Trust Companies. Journalists may be able to rely on this exemption but only when writing about investments generally. Journalists may also rely on the specific exemption for journalists addressed below. The purpose of this exemption is to ensure that the Restriction does not apply to those who merely transport the financial promotions of other persons. For example, postal and Internet service providers, courier companies and telecommunications companies. The exemption requires that the transporter does not select, modify or otherwise exercise control over its content before it is made (power to remove material which is illegal, defamatory, in breach of copyright or at the request of a regulatory body does not disqualify the transporter). The FSA considers that the control normally exercised by newspaper publishers or broadcasters over advertisements they carry is likely to be enough for the exemption not to be available to them. Financial promotions made only to or directed at certain types of person sophisticated enough to understand the risks involved are exempt. Investment professionals means: other authorised persons, exempt persons, governments and local authorities, persons whose ordinary business involves carrying on a controlled activity to which the promotion relates (for example, investment trust companies, venture capital providers, companies with a corporate treasury function and firms of lawyers, accountants and actuaries who are exempt from the need to be authorised under FSMA 2000 on the basis that their regulated business is appropriately limited) and persons acting in their capacity as directors, officers or employees of such persons. This exemption, drafted due to the important role financial journalists have in educating the consumer, applies only to any non-real time financial promotion by a person acting as a journalist in a newspaper, or periodical, a regularly updated news or information service or a television or radio broadcast or transmission. The publication, service or broadcast must not be to advise on or lead or enable persons to buy or sell securities or contractually based investments. The term person acting in the capacity of a journalist is not defined and probably covers experts invited in to give a view or contribute an article. If the promotion relates to shares, options, futures or contracts for differences relating to shares and identifies directly a person who owns or provides such an investment, the promotion must be accompanied by an indication of the nature of any financial interest held by the person responsible for the promotion (that is the journalist, editor or family member). This disclosure requirement is itself subject to exemptions. This exemption is intended to meet the situation in which, during the course of a broadcast interview or live website presentation, a financial promotion is made inadvertently by a director or employee not acting as a journalist in relation to shares in his or her company or group company. Interviewee studio guests may be able to rely on this exemption if they make financial promotions during a broadcast.

Mere conduits

Investment professionals

Journalists

Promotion broadcast by company director etc

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Table 4 Exemptions applying to all controlled activities other than accepting deposits and effecting and carrying out non-qualifying contracts of insurance (Part VI of the Order) Example One-off financial promotions Description This exemption does not apply in the case of unsolicited real time financial promotions. The overriding issue is whether the financial promotion is in fact a one-off. The exemption sets out three conditions which, if all are met, are conclusive. Otherwise the factors are indicative only of a one-off financial promotion. The FSA gives the following examples of one-off promotions which satisfy all three conditions provided that the promotion is tailored to the personal circumstances of and addressed to the recipient: (1) individual personal written communications or one-to-one conversations (2) a response printed in a publication or website or given during a broadcast in response to an enquiry from a reader, viewer or listener (3) a response given to a person who asks a question at a presentation or meeting (4) a response to a question raised by another person using an Internet chat room or bulletin board. Certified high net worth individuals and sophisticated investors The Order seeks to facilitate and reduce the cost of capital-raising from qualifying high net worth individuals and sophisticated investors respectively by lifting the Restriction. The high net worth exemption applies only to solicited real time and non-real time financial promotions whereas the sophisticated investor exemption applies to all types of financial promotion. Marketing materials sent to such persons do not need to be issued or approved by an authorised person. A certified high net worth individual is a person with an annual income of at least 100,000 or net assets of at least 250,000 (excluding, among other things, main residence and pension). A sophisticated investor is, broadly, any person sufficiently knowledgeable to understand the risks associated with the type of investment to be marketed to him or her. For the exemptions to apply, the high net worth or sophisticated investor will need to do two things: (1) obtain a certificate from a third party confirming their status, and (2) sign an acknowledgement of their status and the fact the protections otherwise conferred by the Restriction do not apply. The high net worth certificate must come from the investors employer or accountant, and confirm that during the year preceding the date of the certificate the individual had either the requisite annual income or net assets. The certificate must not be more than 12 months old when relied upon by the promoter, for example an entity seeking seed capital funding. A sophisticated investor certificate must be signed by an authorised person confirming that the investor is sufficiently knowledgeable to understand the investment risks involved. To achieve this, the certificate must state the type of investment to which it relates. Those approaching potential investors in this category must therefore ensure that the certificate covers the type of investment forming the proposition. The certificate must not be more than three years old when relied upon by the promoter. In both types of case the financial promotion must not invite the recipient to engage in investment activity with the signatory. The signatory may, however, be an associate or group company of the promoter. The acknowledgement by either type of investor must be signed within the 12 months preceding the investment communication. The terms of the acknowledgement are set out in the Order and require the individual to confirm, among other things, that he or she is of high net worth or sophisticated and is aware of the risks inherent in making the investment. The high net worth individual exemption is intended to be of assistance to unlisted companies seeking venture capital from business angels so it is limited to promotions of shares in or debentures of an unlisted company or derivatives thereof (or funds set up to invest in such opportunities). The consultation draft of this exemption was not limited to promoting investment in unlisted companies, so the scope of this exemption has been significantly tightened up since the consultation. Consequently, for example, this exemption will not be of use to the directors of an offshore hedge fund who wish to communicate the offering document to high net worth recipients in the UK thereby avoiding the requirement for the contents to be approved by an authorised person. The sophisticated investor exemption will, however, be available. There is a related exemption for promotions to associations of high net worth individuals or sophisticated investors. High net worth companies, unincorporated associations and trusts There is an exemption for promotions to high net worth companies, unincorporated associations or trusts. The promoter must believe on reasonable grounds that the recipients qualify as high net worth or be reasonably regarded as directing the financial promotion only at such persons. The high net worth size tests are as follows:
any body corporate which has, or which is a member of the same group as an undertaking which has, a calledup share capital or net assets of not less than

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Table 4 Exemptions applying to all controlled activities other than accepting deposits and effecting and carrying out non-qualifying contracts of insurance (Part VI of the Order) continued Example Description (i) 500,000 if the body corporate has more than 20 members or is a subsidiary undertaking of an undertaking which has more than 20 members (ii) otherwise, 5m
any unincorporated association or partnership which has net assets of not less than 5m the trustee of a trust where the aggregate value of the cash and investments which form part of the trusts assets (before deducing the amount of its liabilities) is 10m or more or has been 10m or more at any time in the year immediately preceding the date of the financial promotion.

In the case of promotions directed at qualifying persons, there are some conditions to satisfy. The first is that the promotion should include a description of the person to whom it is directed and an indication that the investment or investment activity being promoted is available only to such persons. The second is that the promotion should include an indication that non-qualifying persons should not act on it and the third that there should be proper systems and procedures in place to identify non-qualifying persons from acting on it. If all three conditions are met the promotion will be conclusively taken to be directed at qualifying recipients. If only one or more is met that is indicative of this. Nationals of EEA States other than the UK A person in another Member State of the EEA who lawfully carries on a controlled activity in that State may promote into the UK as long as the promotion complies with COB 3. This exemption does not apply to unsolicited real time financial promotions.

and 4. Provision is made in the Order for the combination of exemptions in relation to the same promotion. FINANCIAL PROMOTION DECISION TREE In considering whether a nancial promotion by an unauthorised person will require approval or, in the case of a nancial promotion by an authorised person, whether COB 3 will apply, the FSA has produced a sequence of issues to consider (see Figure 1) Financial promotions communicated or at least approved by authorised persons, which do not fall within an exemption in the Order, will be subject to the standards set out in COB 3 unless the promotion falls into one of the categories set out in a table of exemptions in COB 3. These include a useful exemption for promotions to market counterparties and intermediate customers. It is worth noting that the size test for an intermediate customer that is a company called up share capital or net assets of at least 5m is more stringent than the size test for a high net worth

company under the Order. Authorised persons are prohibited by rules in COB 3 from approving real time nancial promotions under FSMA 2000. The regulation of financial promotions by authorised persons Where an authorised person makes a nancial promotion he or she will not be subject to the Restriction. Accordingly, any nancial promotion by an authorised person will not be a criminal oence and any resulting contract will not be unenforceable. The provisions of COB 3 will apply, however, (unless the particular promotion is outside the scope of COB 3 because the promotion could have been communicated lawfully by an unauthorised person under the Order or because the promotion falls within the FSAs own table of exemptions in COB 3). Standards set by the FSA for authorised persons In this part of the paper rm means an authorised person. The FSA is responsible

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No

Am I making a communication or causing it to be made? Yes

No Is it an invitation or inducement? Yes No Does the invitation or inducement relate to a controlled investment? Yes No Is the invitation or inducement to engage in investment activity? Yes No Is it made in the course of business? Yes No Does it originate outside the UK? Yes No Does it have an effect in the UK? Yes Yes Is the promotion exempt? No Am I an authorised person? No Yes No

Approval not required?

COB 3 potentially applies

Yes Is the financial promotion real time?

No

Financial promotion cannot be communicated

Approval by an authorised person is needed

Figure 1

Financial promotion decision tree

for regulating the day-to-day conduct of business by rms including their nancial promotions. The FSA has published 11 Principles for Businesses (the Principles) as a general statement of the fundamental obligations of rms under the regulatory regime and reecting the FSAs regulatory objectives as laid down by FSMA 2000.

One of these objectives is the protection of consumers. Two of the Principles are relevant to marketing: Principle 6 (Customers interests), which requires a rm to pay due regard to the interests of its customers and treat them fairly

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Principle 7 (Communications with clients), which requires a rm to pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. The purpose of COB 3 is to elaborate those two Principles in detailed rules and guidance. Prior to making or approving a non-real time nancial promotion an individual or individuals with appropriate expertise must conrm on behalf of the rm that the nancial promotion complies with the rules in COB 3. In practice the conrmation exercise is likely to be carried out by a rms compliance ocer in conjunction with an individual with expertise in the nancial product or service being promoted. Firms are required to make adequate records of each such promotion and retain them for specied periods. COB 3 species detailed form and content requirements for nancial promotions. Non-real time financial promotions A rm must be able to show it has taken reasonable steps to ensure that a non-real time nancial promotion is clear, fair and not misleading (the Standard) and must ensure that it contains the name of the rm and either an address of the rm or a contact point from which an address is available. The FSA has made the following evidential provisions, compliance with which will prove that the rm has met the Standard. The rm should take reasonable steps to ensure that, for a non-real time nancial promotion: its promotional purpose is not in any way disguised or misrepresented any statement of fact, promise or prediction is clear, fair and not misleading and discloses any relevant assumptions any statement of opinion is honestly

held and, unless consent is impracticable, given with the consent of the person concerned the facts on which any comparison or contrast is made are veried, or, alternatively, that relevant assumptions are disclosed and that the comparison or contrast is presented in a fair and balanced way, which is not misleading and includes all factors that are relevant to the comparison or contrast it does not contain any false indications, in particular as to the rms independence, the rms resources and scale of activities, or the scarcity of any investment or service the design, content, or format does not disguise, obscure or diminish the signicance of any statement, warning or other matter which the nancial promotion is required by COB 3 to contain it does not include any reference to approval by the FSA or any government body, unless such approval has been obtained in writing from the FSA or that body it does not omit any matters the admission of which causes the nancial promotion not to be clear, fair and not misleading the accuracy of all material statements of fact can be substantiated.

A non-real time nancial promotion which includes a comparison or contrast must comply with specic requirements set by the FSA. These are that the promotion must: compare investments or services meeting the same needs or that are intended for the same purpose objectively compare one or more material, relevant, veriable and representative features of those investments or services, which may include price

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not create confusion in the market place between the rm itself (or the person whose nancial promotion it approves) and a competitor or between the rms trademarks, trade names, other distinguishing marks, investments or services (or those of the person whose nancial promotion it approves) and those of a competitor not discredit or denigrate the trademarks, trade names, other distinguishing marks, investments, services, activities or circumstances of a competitor not take unfair advantage of the reputation of a trademark, trade name or other distinguishing marks of a competitor not present investments or services as imitations or replicas of investments or services bearing a protected trademark or trade name indicate in a clear and unequivocal way in any comparison referring to a special oer the date on which the oer ends or, where appropriate, that the special oer is subject to the availability of the investments and services, and, where the special oer has not yet begun, the date of the start of the period during which the special price or other specic conditions shall apply. Specific non-real time financial promotions The FSA sets additional standards for specic non-real time nancial promotions, that is a non-real time nancial promotion which identies and promotes a particular investment or service. Such promotions must include a fair and adequate description of the nature of the investment or service; the commitment required; the risks involved and, if it relates to investment or service of a person other than the rm making the communication, contain a name of that person in addition to the name and address or contact point of the authorised person. The rules also

make specic provision to cover particular topics such as past performance and projections for certain types of investment such as life policies. It is worth considering in more detail the rules on past performance as this is an area of topical interest. On past performance in particular, the FSA has made rules to ensure that any nancial promotion about a specic investment includes information relating to a relevant and sucient period of past performance to provide a fair and balanced indication of performance and contains a warning that past performance will not necessarily be repeated; the warning should be drafted to t the design of the promotion and its audience. In addition, the rule requiring the contents of a nancial promotion to be clear, fair and not misleading may be breached if inappropriate use is made of past performance information. The FSA issued a consultation paper in April 2002 which discussed several proposals relating to the use of past performance. One proposal is that past performance should not be the main or predominant message of a nancial promotion (it seems at this stage that this is likely to be adopted by the FSA). The FSA acknowledges that it may be dicult at times to decide when something is the predominant message but says this has not deterred the Advertising Standards Authority from applying such a rule or from using an approach that considers the eect and message of the advertisement as a whole and the overall impression it gives. A second proposal is that past performance warnings should be included in the main text of the advertisement and not buried in the small print. A third proposal is that the practice of constructing hypothetical past performance based on information other than that based on the actual performance of an investment should be banned. The paper also states, however, that the FSA

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would not include in the category of hypothetical past performance, past performance information based on the performance of an existing fund, for example, where. . . a fund previously unavailable to the retail public has been cloned for use in a retail product, and the actual performance gures of the funds were adjusted accordingly. Real time financial promotions First, a rm is prohibited by the FSA from approving a real time nancial promotion for communication by an unauthorised person. A rm must take reasonable steps to ensure that individuals who make a real time promotion on its behalf: do so in a way which is clear, fair and not misleading; do not make any untrue claims; make clear the purpose (or purposes) of the nancial promotion at the initial point of communication; and identify themselves and the rm which they represent if time and method of communication were not previously agreed by the recipient (i) check that the recipient wishes them to proceed (ii) terminate the communication if the recipient does not wish them to proceed (but may ask for another appointment) (iii) recognise and respect, promptly, the right of the recipient to end the communication at any time, or refuse any request for another appointment. do not communicate with a person, without prior agreement, at an unsocial hour, or on an unlisted telephone number if applicable, comply with the rules concerning polarisation and status disclosure.

A rm must not make an unsolicited real time nancial promotion unless: the recipient has an established customer relationship with the rm such that the recipient envisages receiving unsolicited real time nancial promotions; or the nancial promotion relates to a generally marketable packaged product which is not a higher volatility fund or a life policy with a link (including a potential link) to a higher volatility fund; or the nancial promotion relates to a controlled activity to be carried on by an authorised person or an exempt person; and the only controlled investments involved or which reasonably could be involved are readily realisable securities (other than warrants) and generally marketable non-geared packaged products. Direct offer financial promotions The FSA makes special provision in respect of direct oer nancial promotions, for example, an advertisement in a newspaper advertising an ISA and specifying that a person can invest in it by completing the coupon and sending it o. The following information must be included in any such promotion: a prominent statement that the rm which has communicated or approved the nancial promotion is regulated or authorised by the FSA and that, if a person has any doubt about the suitability of the investment, he or she should contact the rm for advice (or an independent nancial adviser if the rm does not oer advice) the full name and address of the person who is oering the investment or service being promoted the name of the person to whom payment (if any) should be made

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details of any charges and expenses which the private customer will or may bear details of the basis or amount of any commission or remuneration which might be payable by the rm to another person. Specic product by product provision is also made for direct oer promotions. CONCLUSION The main innovation inherent in the new nancial promotion regime is its medianeutrality, in particular the fact it has been drafted to t the realities of electronic communications technology. The predecessor legislation, in particular the 1986 Act, used concepts such as investment advertisement and unsolicited personal visit or telephone call which soon dated. As a result the new regime should not become dated by further advances in communications technology. In addition, under FSMA 2000 there is a single nancial promotion regime which consolidates the three main predecessor

regimes governing the marketing of deposits, insurance and investments. The Restriction is worded to cover any nancial promotion whether real time or not and whether solicited or unsolicited. As such, FSMA diers in approach from the 1986 Act, which had one regime for investment advertisements (which could be termed under FSMA 2000, non-real time nancial promotions) and another for unsolicited (or cold) personal visits or telephone calls (which could be termed under FSMA 2000, unsolicited real time nancial promotions). The opportunity was also taken by the draftsman to ensure that the territorial scope of the Restriction was clear. For example under the 1986 Act, many practitioners considered that investment advertisements sent from the UK to overseas were not covered, while others considered such advertisements were issued in the UK. Finally, some new exemptions from the regime were created. In particular, those for sophisticated investors and, in the private equity or business angels context only, certied high net worth investors.

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