AUTH App 1.2 Introduction

The effect of section 21 of the Act (Restrictions on financial promotion) is that in the course of business, an unauthorised person must not communicate an invitation or inducement to engage in investment activity unless either the content of the communication is approved for the purposes of section 21 by an authorised person or it is exempt. Under section 25 of the Act (Contravention of section 21), a person commits a criminal offence if he carries on activities in breach of the restriction in section 21 of the Act. A person who commits this criminal offence is subject to a maximum of two years imprisonment and an unlimited fine. However, it is a defence for a person to show that he took all reasonable precautions and used all due diligence to avoid committing the offence.

Another consequence of a breach of section 21 of the Act is that certain agreements could be unenforceable (see section 30 of the Act (Enforceability of agreements resulting from unlawful communications)). This applies to agreements entered into by a person as a customer as a consequence of a communication made in breach of section 21.

An authorised person will not breach section 21 when communicating a financial promotion. Nevertheless, this guidance may be relevant where an authorised person needs to know whether COB 3 (Financial promotion) applies to a particular communication. For example, to find out if the communication would be subject to an exemption if it were made by an unauthorised person (see COB 3.2.3A R and COB 3.2.5 R).

A person who is concerned to know whether his communications will require approval or, if he is an authorised person, whether COB 3 will apply to his communications will need to consider the following:

1. (1)

   am I making a communication or causing a communication to be made? (see AUTH App 1.6);

2. (2)

   if so, is it an invitation or inducement? (see AUTH App 1.4);

3. (3)

   if so, does the invitation or inducement relate to a controlled investment? (see AUTH App 1.7);

4. (4)

   if so, is the invitation or inducement to engage in investment activity? (see AUTH App 1.7);

5. (5)

   if so, is it made in the course of business? (see AUTH App 1.5);

6. (6)

   if so, and the financial promotion originates outside the United Kingdom, is it capable of having an effect in the United Kingdom? (see AUTH App 1.8);

7. (7)

   if so, or if the answer to (5) is yes and the financial promotion was made in the United Kingdom, is the promotion exempt? (see AUTH App 1.12 to AUTH App 1.15 and AUTH App 1.21).

8. (8)

   if not, am I an authorised person?

If the answer to AUTH App 1.2.4 G (8) is yes then COB 3 will apply (subject to additional exemptions in COB 3.2.5 R). If the answer is no, then the promotion must be approved by an authorised person if it is a non-real time financial promotion. Authorised persons are not allowed to approvereal time financial promotion (see COB 3.12.2 R). AUTH App 1.36.2 G contains a flowchart explaining these steps.

One of the main effects of the Act is to bring together in one statute the regulation of persons who provide financial services. These would previously have been regulated under the Financial Services Act 1986, the Banking Act 1987, the Insurance Companies Act 1982 or under laws relating to building societies, friendly societies and credit unions. The Act also consolidates the provisions of those statutes which governed advertising and making unsolicited personal communications.

The restriction in section 21 applies to all forms of communication such as advertising, broadcasts, websites, e-mails and all other forms of written or oral communication whether sent to one person or many. However, the restrictions only apply to a communication made in the course of business and not, for example, to personal communications between individuals.

There are extensive exemptions in the Financial Promotion Order. This is explained in greater detail in AUTH App 1.11 to AUTH App 1.15 and AUTH App 1.21.