Can a regulated foreign company directly take on an employee unregulated by the Financial Conduct Authority (FCA) to carry out financial promotion in the United Kingdom?

Posted: 03/11/2021

Here is a common situation that could apply to overseas companies seeking to recruit UK-based employees.

Company A is an incorporated and resident venture capital company outside the UK. Company A intends to employ a person (X) in the UK to carry out the following activities as an employee of Company A:

• deal flow sourcing / communication / organising events / promoting Company A’s brand
• execution of investment operations
• contribution to the ongoing fundraising of Company A.

Company A is not, and does not intend to become, authorised by the FCA to carry on regulated activities.

Regulated activities – the general prohibition

Under section 19 of the Financial Services and Markets Act 2000, a person (which includes companies) must not carry on a regulated activity in the UK or purport to do so unless that person is an authorised or an exempt person. This is known as the “general prohibition” and lies at the heart of the regulation of financial services.

An authorised person is a person who has been authorised by the FCA (or the Prudential Regulation Authority (PRA) for banks and insurers). An exempt person is a person who  carries on the regulated activity in its capacity as an appointed representative of an authorised person (or falls into another available exemption).

Persons carrying on a regulated activity are required to be authorised only if they carry on the activity “by way of business”.

It was clear that Company A (through its employee X) would be carrying on its activities in the UK by way of business.

Consequences of breaching the general prohibition

Carrying on a regulated activity in the course of business when not authorised is a breach of the general prohibition. This not only has civil consequences but is also a criminal offence. Contracts entered into in breach of the general prohibition are unenforceable by the party who is in breach (except with the consent of the court or  - in some cases for credit agreement - the consent of the FCA).

In addition, any officer such as a director of a company who breaches the general prohibition is also guilty of a criminal offence if it was committed with that officer's consent or connivance or as a result of their neglect.

A further potential consequence of breaching the general prohibition is that the FCA may take into account a previous breach when considering whether a person is fit and proper to be authorised, for example as a senior manager engaged in the financial services sector. This is an additional risk to the risk of prosecution.  It means that, where a person or company wishes to become authorised in the UK in the future, it may not be able to do so if it has previously breached the general prohibition. 

Regulated activities – arranging deals in investments

Regulated activities are as set out in the Financial Services and Markets Directive (Regulated Activities) Order 2001, SI 2001/544 (Regulated Activities Order) as “specified activities” that relate to a “specified investment” or property of any kind and are carried on by way of business in the UK.

The relevant regulated activities to consider for Company A are under Article 25 of the Regulated Activities Order: arranging deals in investments. The description of the activity is as follows:

The wording and scope of Article 25 are deliberately wide.  All of Company A’s activities described in the Background section in this note are likely to fall within the regulated activity of “arranging deals in investments”.

Regulated activities - exemptions

The structure of UK financial services regulation is to impose a restriction (on carrying on a regulated activity) by defining the activity in very broad terms and so casting the restrictive net very wide but to then allow certain defined exemptions to the restriction.  The exemptions create a “safe harbour” where the relevant activity can be carried on without the need to be FCA authorised or to comply with financial services regulation.

The relevant exemption to Article 25 of the Regulated Activities Order that Company A can rely on is contained in Article 28 of the Regulated Activities Order: Arranging transactions to which the arranger is a party.

Activities carried on by X acting as the employee of Company A are, for these purposes, carried on by Company A.

Therefore, provided that the arrangements that would otherwise be caught under Article 25 are arrangements which are made that Company A enters into, or with a view to Company A entering into, are not caught under Article 25 because of the exemption available under Article 28.  As such, Company A is not required to be FCA authorised to carry on those activities.

As Company A is not required to be FCA authorised, it is not required to comply with the Senior Managers and Certification Regime (SMCR) and conduct rules for its employees in the UK because the SMCR only applies to authorised persons.

Financial promotion – the restriction

The second main pillar of financial services regulation in the UK is the financial promotion regime.  The restriction on financial promotion is independent of the general prohibition referred to above. It applies even where the financial promotion relates to an activity that is not a regulated activity or where a relevant exemption from the requirement to be authorised is available.

The restriction on financial promotion prescribes that it is a criminal offence for a person or company to communicate, in the course of business, an invitation or inducement to engage in investment activity unless:

• such person or company is authorised by the FCA (or PRA) or
• the content of the communication is approved by an FCA (or PRA) authorised person or
• the communication is covered by one or more statutory exemptions.

A financial promotion is any “invitation or inducement to engage in investment activity”, and can be spoken, by email, on paper, a website, etc. The definition is intentionally wide and intended to capture any marketing communication about a specific investment opportunity.

A financial promotion can take many forms such as an information memorandum, an investment agreement, a press release, information posted on the company’s website, communications in social media including blogs, microblogs (such as Twitter), social networks (such as Facebook and LinkedIn), forums, image and video-sharing platforms (such as YouTube, Instagram, Vine, and Pinterest), and face to face (or telephone, Zoom, etc) discussions.

In Company A’s case, communicating an invitation or inducement to a third-party to invest in Company A’s venture capital fund is very likely  - almost certainly- to fall within the restriction on financial promotion.

Exemptions

A number of statutory exemptions to the restriction on financial promotion are available under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (Financial Promotion Order) where certain types of promotion are made to categories of investors such as certified high-net-worth individuals (HNWI), self-certified sophisticated investors, certified sophisticated investors, high-net-worth companies etc.

All of the exemptions rely on identifying the investor as falling within one of the exempt categories; the promoter providing the investor with certain prescribed information; and, in most cases, also obtaining a signed declaration or certificate from the investor in a prescribed form.

Company A should ensure that all activities carried on in the UK will fall within one of the relevant exemptions. It is important that Company A follows the correct procedures to ensure that it can benefit from the protection for each relevant exemption.

The relevant exemptions are:

Certified high-net-worth individuals (HNWI)

Article 48 of the Financial Promotion Order provides an exemption where the promotion is made to or directed only at persons who have signed a certified high-net-worth statement (in the prescribed form) within the previous 12 months:

• confirming that they have an annual income of over £100,000 or net assets (excluding a primary residence) of over £250,000 throughout the preceding year and
• giving up the complaint and compensation right they have under the financial promotion rules.

High net worth companies, unincorporated associations, etc

Article 49 of the Financial Promotion Order provides an exemption for communications made only to recipients whom the person making the communications believes, on reasonable grounds, to be persons within one of the following categories:

• companies that have, or is in a group with one that has, share capital or net assets of at least £500,000 (where the company in question has, or is a subsidiary undertaking of a company that has, more than 20 members) or £5 million
• unincorporated associations or partnerships with net assets of £5 million or more and
• trustees of trusts with gross cash and investments of at least £10 million.

Investment professionals

Article 19 of the Financial Promotion Order provides an exemption where the recipients of the promotion are sufficiently expert to understand the risks involved with investments and do not therefore need any additional statutory protection.

For the promotion to be reasonably regarded as directed only at such recipients, ‘proper systems and procedures’ must be in place to prevent it from being communicated to recipients other than investment professionals.

In addition, the promotion must be accompanied by a statement in the prescribed form that:

• is directed at persons with professional investment experience and that any investment activity to which it relates is available only to such person and
• persons who do not have professional experience in investments should not rely on it.

Self-certified sophisticated investors

The exemption under Article 50A of the Financial Promotion Order covers communications made to - but not directed at - an individual whom the person making the communication believes, on reasonable grounds, to be a self-certified sophisticated investor relating to promotions of investments in unlisted companies.

To qualify as a self-certified sophisticated investor, an individual must have signed a statement in a prescribed form and content within the previous 12 months which confirms that they meet the requirements to be a self-certified sophisticated investor and that they understand what this means,

It is important to note that such promotion may be subject to the private placement regimes in other jurisdictions outside the UK, ie national laws restricting or regulating in the marking of securities in the country where that recipient person is resident or situated. This is, however, outside the scope of this article.

For any of the above-mentioned exemptions to apply, each promotion must be accompanied by a warning in the prescribed form that an authorised person has not approved the content of the promotion and that engaging in investment activity may expose the individual to risk. There are also compliance formalities that require the issuer to obtain a signed certificate from the proposed investor in the prescribed form in order to fall within the exemption.

In summary, a foreign company can engage someone as an employee to carry out regulated activities even is that person is not themselves regulated. But it must ensure that it falls within one of the available exemptions and get the process right. If it fails to do so, its directors may be looking at criminal sanctions and an agreement with an investor that the company is unable to enforce.

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