• The FCA highlights the need to reform certain exemptions to restrictions on financial promotions
• The London Stock Exchange publishes guidance on climate reporting
• The maximum penalty for insider dealing and related offences will increase from 1 November 2021
• The British Business Bank publishes a report on progress towards net zero among smaller businesses

FCA highlights need for financial promotion exemptions reform

The Financial Conduct Authority (FCA) has said that certain exemptions from its financial promotions regime are “no longer fit for purpose” and represent a “significant vulnerability” in the regime. The comments come in the FCA’s Perimeter Report for 2020/2021.

Under the regime, it is a criminal offence to communicate a financial promotion unless either:

• the person doing so has been authorised by the FCA or the Prudential Regulation Authority; or
• the contents of the promotion have been approved by an FCA-authorised person.

Financial promotions occur in various forms, including where a company (or someone on its behalf) wishes to offer its shares to investors (whether to existing shareholders or prospective investors).

There are, however, numerous exemptions to the prohibition. If an exemption applies, it can be communicated by an unauthorised person without the need for approval. Moreover, certain standards (such as the requirement to be “clear, fair and not misleading”) do not apply to the promotion.

The FCA has drawn attention to two specific exemptions which apply where the promotion is directed only at sophisticated investors and/or high net worth (HNW) investors. Both exemptions rely on “self-certification”: the relevant investor certifies that they meet the criteria. The person communicating the promotion can then rely on that certification.

Generally speaking, financial promotion exemptions can be combined. Given the breadth and number of exemptions, this often results in a promotion not needing to be approved. It is common to see the sophisticated and HNW investor exemptions included in this context.

The FCA is concerned that the conditions for being a sophisticated or HNW investor have now become too easy to satisfy. In particular:

• A person can qualify as a sophisticated investor if they have made more than one investment in an unlisted company in the preceding two years, but, with the advent of crowdfunding platforms, it has become easy for unsophisticated investors to meet this criterion.
• A person qualifies as a HNW investor if they have an annual income of £100,000 or more or they have £250,000 or more of net assets (excluding primary residence and pension assets). Although this is out of reach for many people, these thresholds are lower than in other jurisdictions, and recent changes to pension access in the UK have made it easier for individuals to convert pension assets into cash (which does count towards the net-asset threshold).

Finally, the FCA notes that there is no requirement to check that individuals who make a self-certification actually meet the relevant criteria. It is concerned that some firms may be “coaching” ordinary consumers into self-certifying.

The FCA believes there need to be significant changes to address these and, in particular, reform of the relevant thresholds. Responsibility for reformulating the financial promotions regime lies with the Treasury. We wait to see whether the Treasury takes any action in response to the FCA’s concerns.

London Stock Exchange publishes climate reporting guidance

The London Stock Exchange (LSE) has published new guidance intended to help listed companies (including Main Market companies) and AIM companies to understand climate-related issues in the context of their business and to take steps towards gathering and reporting relevant information.

The guidance is designed for all companies listed on the LSE’s markets, regardless of sector, size or the stage of journey and is designed to be read alongside the LSE’s separate guidance on environmental, social and governance (ESG) reporting.

In particular, the guidance covers reporting and disclosure under the recommendations of the Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations). To achieve this, the guidance recommends a three-step process:

• Step 1 – Disclosure diagnosis and context. Companies should understand the relevance of climate change and take stock of their current strategy and disclosure practices. To this end, the guidance provides a checklist to determine whether or not a company is providing sufficient information to investors.
• Step 2 – Integration of climate-related risks and opportunities. Management should integrate climate-related considerations into risk assessment and strategy development. This should come from the top and filter down through policies, processes and strategy.
• Step 3 – Disclosure of climate-related practices and data. The company should communicate its understanding by disclosing its climate-related practices, strategy and objectives to investors and stakeholders.

Other items

• Maximum penalty for insider trading and other offences increased. From 1 November 2021, the maximum penalty for the criminal offences of insider dealing and making false statements or impressions in relation to securities will increase from seven years to ten years. The Regulations which make the change were published on 21 October 2021.
• British Business Bank reports on smaller businesses’ transition to net zero. The British Business Bank has published a new report, following a survey of 1,200 smaller businesses, on the progress smaller businesses have made in their transition to net zero. The report finds that small businesses account for around 50% of total greenhouse gas (GHG) emissions from UK businesses. Despite this, whilst 60% of early-stage businesses were aware of net zero concepts, only just under 50% were ready to prioritise decarbonisation. The report examines the barriers to progress and ways to unlock ambition in moving towards net zero.