FSA Guidance on Financial Promotion: Communications by Listed Companies

Author:Ms Carol Shutkever
Profession:Herbert Smith
 
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The FSA has issued its long-awaited guidance on financial promotion. This is the important last piece in the jigsaw of the complex financial promotion regime. The financial promotion restriction is a key part of the regime established by the Financial Services and Markets Act, particularly for unauthorised persons. It sets the boundaries of what can be communicated about investments without the involvement of a financial adviser. Listed companies need to be aware of how the restriction applies to both their public communications and their private transactions.

The FSA Guidance

The guidance issued by the FSA will be of great assistance in interpreting and understanding some of the complexities of the financial promotion restriction. The guidance is very long - some eighty pages - and can be difficult to follow. However the good news is that the FSA has tried to be as helpful as possible in terms of interpreting the restriction in a sensible and flexible manner and also in giving practical examples of the way in which the various exemptions can apply.

The guidance also contains a short section dealing with the extent to which a company, in the course of carrying out its ordinary activities, may be treated as carrying on a regulated activity for the purposes of the FSMA.

Financial promotion restriction

The restriction on financial promotion is contained in Section 21 of the Financial Services and Market Act 2000 ("FSMA").

This provides that a person must not:

"in the course of business, communicate an invitation or inducement to engage in investment activity"

unless he is an authorised person under the FSMA or the communication is approved by an authorised person.

There are a range of exemptions from the prohibition, which are all set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 ("Financial Promotion Order"). The table at the end of this briefing summarises the key exemptions in the Financial Promotion Order that listed companies are likely to rely on.

The regime is characterised by the very broad nature of the restriction and the very detailed and complex nature of the exemptions.

The guidance is available on the FSA web site as part of the FSA Handbook (Appendix 1 of the Authorisation Manual). The FSA also plans to make it accessible as a stand alone document on the site in the near future.

This briefing looks at the key types of communications that may be made by listed companies which could be caught by the restriction and, in light of the FSA financial promotion guidance, when these might be problematic. Some communications will definitely not be caught by the financial promotion restriction, either because there is no invitation or inducement to engage in investment activity or because an exemption applies. Other communications will or may be caught, in which case further advice will need to be sought by the company and the communication may need to be made or approved by an authorised person.

Status of the guidance

The guidance sets out the FSA's views on the financial promotion restriction and the scope of the exemptions. If a person acts in line with the guidance, the FSA will assume that the person has complied with the relevant requirements, and therefore would not prosecute that person for breach of the restriction or take regulatory proceedings against that person. However, the guidance does not bind the courts as regards the fact that a contract entered into in consequence of a breach of the financial promotion restriction is potentially unenforceable. The FSA just says that it will be of persuasive effect for a court when considering whether it will be just and equitable to allow such a contract to be enforced.

Scope and structure of the guidance

The guidance sets out comments on each of the elements of the definition of a financial promotion:

communicate;

in the course of business;

an invitation or inducement;

to engage in an investment activity.

In particular, there is a detailed overview of the concept of an invitation or inducement, and the types of statements that will not be treated as an invitation or inducement.

A series of examples of different types of communications and whether these cross the line is included in the guidance.

The guidance then goes on to look at some of the key concepts in the financial promotion regime, including who is treated as communicating the financial promotion and to whom, the concepts of real time and non-real time financial promotions and when a real time communication can be treated as solicited (see box below for the meaning of these terms).

There is then commentary on most of the important exemptions in the Financial Promotion Order covering the scope and practical use of those exemptions.

Finally, but importantly, there is a separate and detailed section at the end of the guidance on the application of the regime to company statements and briefings, and the exemptions that are likely to apply.

Types of communication: real time and non-real time, solicited and unsolicited

One of the features of the financial promotion regime is that it divides communications into different types. The exemptions then vary according to whether they apply to all types of communications or just to certain types. It is therefore often important to determine what sort of communication is being made, in order to determine whether or not an exemption is available.

The key distinctions are between real time and non-real time communications and between unsolicited real time communications and solicited real time communications.

Real time and non-real time

Real time communications are defined as those which take place in the course of a personal visit, telephone conversation or other interactive dialogue.

Non-real time communications are defined as any other form of communication.

Communications by letter, e-mail or contained in publications (defined to include newspapers, web sites, radio and television) are specifically deemed in the Financial Promotion Order to be non-real time communications.

It is the interactive nature of the dialogue which is important, not whether the communication is contemporaneous. Therefore, a speech at a meeting can be non-real time if it is a presentation which is a one-way flow and does not involve an interactive dialogue with the audience.

It is also important to note that a real time communication can never be approved in advance by an authorised person - if no exemption applies then the company cannot make the statement at all, it can only be made by an authorised person.

Solicited and unsolicited

A real time communication is treated as solicited if it is initiated by, or made at the express request of, the recipient. All other real time communications will be unsolicited. (For non-real time communications the distinction is irrelevant as regards the exemptions and there is therefore no definition). Including standard terms in a document stating that a recipient is deemed to have solicited a communication will not be sufficient to make it solicited.

A lot of exemptions do not apply to unsolicited real time communications, that is a communication which is part of an interactive dialogue and which has not been initiated by or made at the express request of the recipient.

General Points about Company Statements and the Financial Promotion Restriction

When might a listed company's public statements be a financial promotion?

The exemptions to the financial promotion regime only need to be considered in relation to public statements by listed companies if those public statements are treated as an invitation or inducement to engage in investment activity. This will normally be because...

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