On 15 December 2021, HM Treasury published a consultation on the financial promotion exemptions for high net worth individuals and sophisticated investors. Specifically the consultation considers three specific exemptions under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO):
- Certified high net worth individuals (Article 48 of the FPO).
- Sophisticated investors (Article 50 of the FPO).
- Self-certified sophisticated investors (Article 50A of the FPO).
HM Treasury is consulting on five proposals:
- Increasing the financial thresholds for high net worth individuals. Currently, high net worth individuals are defined as individuals who certify that they have earned at least £100,000 in the previous year or hold net assets of at least £250,000. At a minimum, the government is of the view that the thresholds should be increased in line with inflation. Between 2001 and 2021 inflation has meant that prices have risen by 54%. Under this approach, the net income threshold to be considered high net worth would be uprated to £150,000 and the net asset threshold to £385,000. This would ensure that the thresholds for high net worth individuals would reflect changes to investor purchasing power since 2001. The government does not propose changing the assets in scope of the net asset calculation, but welcomes views on what the appropriate value should be.
- Amending the criteria for self-certified sophisticated investors. One of the criteria to be classified as a self-certified sophisticated investor is to have made more than one investment in an unlisted company in the previous two years. The government is of the view that this is no longer an indicator of investor sophistication and this element should be removed from the self-certified sophisticated investor definition. Another of the tests to be a self-certified sophisticated investor is that an individual has been in the last two years a director of a company with an annual turnover of at least £1 million. In a similar manner to the high net worth individual thresholds, this value has been devalued by inflation since it was introduced in 2005. The government therefore proposes updating the threshold in line with inflation that has taken place between 2005 and 2021 to a value of £1.4 million.
- Placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated. Firms that make promotions under the high net worth individual and self-certified sophisticated investor exemptions should ‘believe on reasonable grounds’ that the individual they are communicating to has signed the high net worth individual or self-certified sophisticated investor statement. Instead, the government proposes that the emphasis of the ‘reasonable belief’ be shifted so firms communicating the financial promotion must have a reasonable belief that an individual meets the criteria, not simply that they have signed a relevant statement. It would be for the firm to determine how it comes to this conclusion, and to document this information accordingly. The investor would still be required to sign the investor statement, so there would be a responsibility on both the investor and firm to ensure the relevant conditions had been met. The government also proposes that firms should be required to provide details about themselves in any communications made using the exemptions. This would include: the firm’s address; contact details of the firm and if appropriate, the firm’s Companies House number (or international equivalent).
- Updating the high net worth individual and self-certified sophisticated investor statements. The government is proposing three substantive amendments: updating the format, simplifying the language and requiring greater investor engagement. In the current investor statements, investors only have to sign the bottom of the statement declaring they are high net worth or sophisticated, without specifying which of the relevant criteria they meet. The government is proposing that in the updated statement the investor would be required to select which specific criteria they meet in order to be classified as high net worth or sophisticated, and to set out how they meet these criteria.
- Updating the name of the high net worth individual exemption. The government proposes to amend the name of the exemption to the ‘high net worth individual’ exemption, removing certified from the title.
The deadline for comments is 9 March 2022.