A Brief Overview of the Section 21 Financial Services and Markets Act

The Financial Services and Markets Act 2000, often described by its acronym FSMA, is the main law for financial services in the UK. It’s the one that sets out most of the rules for financial firms and markets. 

Section 21 of FSMA is perhaps the most central piece of this law. It deals with financial promotions, which can loosely be defined as messages that encourage people to invest or use financial services. This section is important in the 21st century because it protects consumers from misleading adverts - or social media campaigns.

It also makes sure only approved firms can verify these promotions. All in all, understanding Section 21 is absolutely essential for anyone working in UK financial services.

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What is in Section 21? 

In short, Section 21 FSMA stops people from making invitations or encouragements to invest unless they meet certain conditions. These conditions are

1. The person is approved by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA)
2. An approved person has checked and allowed the promotion
3. The promotion falls under an exception in the Financial Promotion Order 2005

This rule applies to all types of communication, from adverts and brochures to email newsletters and Tweets. Given that brand voice is not only more important than ever before but prolific in its output, the relevance of this has never been greater.

The ultimate aim of Section 21 FSMA is to protect consumers from unfair or misleading financial ads—swindling people into making decisions of which they do not fully understand the risks of (or have been oversold on the benefits). 

The FCA checks that financial promotions are fair, clear, and not misleading. Breaking this rule, of course, leads to fines and legal trouble, as well as a loss in reputation because it’s all made public. 

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Scope of Application 

Section 21 applies to a wide range of people and businesses. It covers

• Financial firms
• Investment companies
• Cryptoasset projects
• Insurance providers
• Banks and building societies
• Credit providers
• Anyone promoting financial products or services

The rule applies to all types of financial promotions, including:

• Adverts in newspapers, TV, or radio
• Websites and social media posts
• Emails and text messages
• Verbal communications, like sales pitches and webinars

Section 21 applies to promotions made in the UK or from the UK to other countries. But, it also covers promotions from other countries into the UK. The law aims to protect UK consumers and its own market.

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Exemptions and Approved Persons 

While Section 21 is strict, there are some exemptions. These allow certain promotions without FCA approval. For example, when the promotions are aimed at professional investors, high-net-worth individuals, sophisticated investors, and promotions by journalists. 

Firstly, this explains why we often see opinion pieces in respected publications suspiciously promote certain risky investments, without proper disclaimers. 

Secondly, the intuition behind excluding professional investors is simply that they do not require the same level of risk debriefs and warnings, because they’re more clued up. Existing knowledge can be assumed for professionals, but not for retail investors (the everyday investor).

Approved persons play a key role in the Section 21 system. These are usually FCA-authorised firms. They can check and approve promotions from non-authorised businesses. This allows smaller firms to promote their services without full FCA authorisation. Otherwise, more established firms gain authorisation themselves to keep marketing materials and compliance fully in-house. There are pros and cons to either, but just remember that most authorisation applications result in rejection. It isn’t easy.

The approval process involves:

• Checking the promotion for accuracy
• Ensuring it's fair, clear, and not misleading
• Verifying that it complies with FCA rules
• Confirming it's appropriate for the target audience

Approved persons must keep records of their checks and approvals. They are responsible for the promotions they approve. If a promotion breaks the rules, both the promoter and the approver can face penalties.

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Consequences of Non-compliance 

Breaking Section 21 rules can have serious consequences. For example

1. Criminal charges and fines
2. Civil penalties from the FCA
3. Reputational damage
4. Loss of FCA authorisation
5. Compensation claims from consumers

Fines can be very large, sometimes millions of pounds (they’re also made public, meaning reputation is certainly damaged). The FCA can also ban individuals from working in financial services. In serious cases, people can go to prison for a couple of years. It’s also worth bearing in mind that companies may have to pay compensation to customers who lost money due to misleading promotions. 

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Recent Developments and Changes 

As the landscape changes quickly (often led by technological innovation), Section 21 has seen important changes. The Financial Services and Markets Act 2023, which became law on June 29, 2023, brings in new rules. It introduces a 'Financial Promotion Requirement' (FPR) for all authorised persons. This new regulatory gateway started in February 2024.

The FCA has also updated its rules on high-risk investment promotions. These changes aim to protect consumers from risky investments they don't understand. The new rules require clearer risk warnings and ban incentives to invest, like 'refer a friend' bonuses, as well as requiring a ‘cooling off period’. 

The new Financial Promotions Gateway system has been a way to tighten control over who can approve financial promotions. Firms will need specific FCA permission to approve promotions for unauthorised businesses.

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Conclusion

Section 21 of FSMA is perhaps the most important piece of regulation when it comes to growing a UK financial services company. It is far from an arbitrary piece of red tape—it upholds the integrity of the market. Recent changes show it's evolving to meet these new challenges, and firms (and any approvers they work with) must be proactive in understanding not just recent changes, but upcoming ones. As financial services change, Section 21 will likely keep adapting. 

For help in staying on top of these upcoming changes, please get in touch with a member of the Englebert team.

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