Commercial Awareness Update – W/C 29th April 2024

THE GOVERNMENT’S PARTIAL REVERSAL OF SECTION 21 OF FSMA 2000

The Financial and Services Markets Act 2000 (FSMA 2000) is the primary means of regulating the UK’s financial industry, including investments, despite previous heavy amendments by the Financial Services Act 2012.

There is a broad scope for misleading promotions, hence the Act’s strict prohibitive controls.

Section 21 of FSMA previously stated that financial promotions and inducements to engage in investment or claims management activities during the course of a business are strictly prohibited unless authorised by the relevant authority or an exemption applies.

After careful consideration, the government recently instigated a U-turn on this rule, specifically by relaxing the restrictions on financial promotions and inducements to engage in investment or claims management activities.

Reasonings behind the change

The two exemptions previously contained in the FSMA 2000 (Financial Promotion) Order 2005 (FPO) applied to:

• HNWIs, as defined under Article 48, with further broadening of this definition by HMRC that HNWIs are those persons with assets exceeding £10 million, whether liquid or otherwise.
• Self–certified Sophisticated Investors (SSIs) who are those persons who have signed a statement within twelve months that ends on the day the statement was signed, as per Article 50A of the FPO. The statement signed exempts specific financial promotions by unauthorised persons from needing approval.

Under the previous legislative standing, only the above-mentioned collective need not be authorised by a relevant body to induce investments. However, this disparity in exemptions led to the consensus that the ‘calibrated allowances ‘were unjust and, in many ways, distorted, thereby affecting the ability of start-up businesses to secure investments, and restricting smaller-scale investors.

Resultantly, the government initiated a two-year consultation period in 2021 via the Treasury Select Committee on financial promotion exemptions and recommendations for reviewing the suitability of the FPO. This extensive and inclusive consultation process involved gathering feedback from stakeholders, including HNWIs, SSIs, and financial industry professionals, to ensure fair and balanced changes.

Following this, the government announced in its 2024 Spring Budget that a partial reversal of relatively recent changes made to the exemptions would apply. The reversal came into force on 27 March 2024 and returned the use of the previous eligibility criteria, including:

• The reduction of the required thresholds to qualify as an HNWI being an individual income of instead £100,000 in the previous financial year or £250,000 worth of net assets throughout the last financial year.
• Fulfilling the SSI criteria requires making at least two investments in an unlisted company in the previous two years.

Notably, investor statements (legal documents outlining investment opportunities conditions) that adhere to the previous legislative rules will remain in effect until and including 30 January 2025. The transition period is designed to afford businesses ample time to adjust to the improved controls and ensure a smooth transition into the new regulatory landscape.

Impact

As with any changes to legislation governing financial services and promotions, some effects on the legal landscape, such as compliance requirements, regulatory enforcement, and legal advice provided to clients engaged in economic activities, must be expected, with some of the measurables including:

Increased access to investment opportunities

By relaxing the exemptions, more individuals may access investment opportunities previously restricted to HNWIs and SSIs who satisfied the previous eligibility criteria.

This could lead to a broader client base seeking legal advice on investment matters, igniting intrigue in the potential for new and diverse investment opportunities.

Legal compliance and due diligence

Legal professionals play a crucial role in ensuring their clients understand the implications of these changes and comply with any new regulatory requirements.

Their roles might involve updating client due diligence procedures to assess investors’ eligibility under the revised exemptions, emphasising their value and integral role in the process.

Risk management and disclosure

With a broader pool of potential investors, legal advisors may need to emphasise risk management and disclosure obligations more.

They may need to provide more comprehensive advice on the risks associated with specific investments and promotions and ensure that clients are adequately informed before making steadfast decisions.

Regulatory oversight and enforcement

Regulatory bodies like the FCA may intensify their oversight and enforcement efforts to ensure that firms comply with the revised regulation. This could include more frequent audits, stricter penalties for non-compliance, and increased scrutiny of financial promotions.

Legal professionals may need to stay updated on these regulatory developments and assist clients in navigating any compliance challenges.

Opportunities for legal advice and structuring

The relaxation of exemptions could increase demand for legal advice on structuring investment arrangements and transactions.

Legal professionals may play a crucial role in helping clients navigate the complexities of investment regulations and optimise their investment strategies.

Overall, the changes could present opportunities and challenges for the legal sector, requiring legal professionals to stay informed, adapt to regulatory changes and provide strategic advice to their clients accordingly.

• By Aqua Koroma 

THE RENTERS (REFORM) BILL

First introduced to the House of Commons on 17 May 2023, the Renters (Reform) Bill (The ‘Bill’) has sparked significant discussion and debate within the housing sector.

This comprehensive legislation aims to overhaul various aspects of the rental market, introducing substantial changes affecting renters and landlords.

The Report and Third Reading Stages were completed on 24 April 2024, and the Bill now sits in the House of Lords. The government aims for Royal Assent before the next General Election in January 2025.

The amendments

The Bill proposes several critical changes to the rental market landscape in the UK.

The Bill seeks to abolish Section 21 evictions, which currently allow landlords to evict tenants without providing a reason after the fixed term of a tenancy agreement has expired. Instead, landlords will be required to provide a valid reason for eviction, such as non-payment of rent or breach of tenancy terms, under the revised Section 8 eviction process.

Moreover, the Bill seeks to extend the minimum notice period required for Section 8 evictions from two to six months. The extension aims to provide tenants with greater security and stability in their rental arrangements, allowing them more time to find alternative accommodation in the event of eviction.

This means greater accountability among landlords and an improvement in the UK’s overall quality of rental accommodation. Further, there is greater security and stability for renters, the prevention of unfair, arbitrary, or retaliatory evictions, and the preservation of landlords’ ability to regain possession of their properties in legitimate circumstances.

The Bill further includes measures to protect against substandard housing conditions. For instance, the legislation proposes mandatory electrical safety checks every five years to ensure rental properties meet acceptable quality and safety standards.

Another significant proposal within the Bill is the introduction of “lifetime deposits.” This provision would allow tenants to transfer their deposits between tenancies, reducing the financial burden of repeatedly paying new deposits when moving between rental properties.

Lifetime deposits could enhance tenant mobility and flexibility, making it easier for renters to secure new accommodation without facing significant upfront costs. They can benefit both renters and landlords by promoting greater financial inclusivity and reducing barriers to entry in the rental market.

The legislation aims to strike a fair balance between landlords’ rights to regain possession of their properties and tenants’ rights to adequate notice and protection against homelessness by extending notice periods.

Impact on tenants and landlords

The Bill will have significant implications for tenants and landlords nationwide.

The legislation represents an important step in enhancing tenants’ rights and protections in the rental market. The abolition of Section 21 evictions and extension of notice periods provide renters with increased security and stability in their rental accommodation, empowering them to assert their rights and challenge unfair eviction practices.

Furthermore, introducing lifetime deposits and improvements to renters’ rights will help address financial barriers and ensure landlords treat tenants fairly and respectfully.

On the other hand, landlords may face challenges adapting to the new regulatory framework introduced by the Bill. Some landlords may express concerns about the reforms’ impact on their ability to manage their properties effectively and respond to changing market conditions.

However, the legislation also presents opportunities for responsible landlords to demonstrate their commitment to providing high-quality rental accommodation and complying with their legal obligations.

Impact on the legal sector

The Bill will also significantly affect the legal sector, generating increased demand for legal services in tenant advocacy, eviction proceedings, and landlord-tenant disputes.

Legal professionals will play a crucial role in advising both renters and landlords on their rights and obligations under the new legislation, helping to ensure compliance with the revised regulatory framework and resolve disputes effectively and efficiently.

The changes introduced by the Bill may lead to greater complexity in legal proceedings related to eviction, tenancy agreements, and property management.

Legal practitioners must stay informed about the evolving legal landscape and navigate the intricacies of new legislation to represent their clients’ interests effectively.

Additionally, the Bill presents opportunities for legal innovation, particularly in developing technology-driven solutions to streamline processes such as deposit management, dispute resolution, and compliance with regulatory requirements.

In conclusion, the Renters (Reform) Bill represents a significant milestone in reforming the rental market and improving the rights and protections of renters in the UK.

While the legislation introduces fundamental changes that will impact both renters and landlords, it also presents opportunities for the legal sector to provide valuable expertise and support in navigating the complexities of the new regulatory framework.

By understanding the Bill’s fundamental changes, effects, and implications, legal professionals can effectively advocate for their clients and contribute to developing a fairer and more transparent rental market.

• By Aqua Koroma