Section 21 Financial Promotions Approval: A Guide

Section 21 of the Financial Services and Markets Act 2000 is the legal foundation of the UK financial promotions regime — it defines who can lawfully approve a financial promotion and makes the unauthorised communication of an unapproved promotion a criminal offence.

For most FCA-regulated firms the financial promotions restriction is a compliance obligation they manage routinely. For firms that approve promotions on behalf of third parties — particularly those with gateway permission — Section 21 creates a direct personal liability that cannot be managed away by contract. Understanding what approval requires, what it means and what happens when it goes wrong is essential for any compliance professional working in this area.

What Does Section 21 FSMA Prohibit?

Section 21 of FSMA 2000 provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless one of two conditions is met: the communicator is an FCA-authorised person, or the content of the communication has been approved by an authorised person. A communication that meets neither condition is an unlawful financial promotion.

The prohibition applies to the act of communication regardless of whether the content of the promotion is accurate, balanced or otherwise in compliance with FCA conduct rules. An entirely compliant promotion issued by an unauthorised person without Section 21 approval is still an unlawful financial promotion. The restriction is structural, not qualitative.

Breach of Section 21 is a criminal offence under Section 25 FSMA, carrying a maximum sentence of two years’ imprisonment, an unlimited fine, or both. The FCA can also obtain an injunction to restrain continuing breach and a restitution order requiring the return of money obtained through unlawful promotions.

Who Can Approve a Financial Promotion?

The Section 21 approval must come from an FCA-authorised person. Not all authorised firms can act as approvers for third-party promotions — since February 2024, firms wishing to approve promotions for unauthorised persons must hold specific gateway permission from the FCA. This requirement is addressed in detail in the FCA Financial Promotions Gateway guide.

Firms approving their own promotions — communicating directly in their own name — do not need gateway permission, but remain subject to all applicable conduct requirements under COBS 4. The Section 21 restriction applies to the communication of promotions by unauthorised persons; it does not separately restrict authorised firms’ own promotions, which are governed by COBS 4 and the FCA’s fair, clear and not misleading standard.

Appointed representatives operate under their principal’s authorisation and therefore communicate within the principal’s Section 21 permission. This does not reduce the principal’s obligations: the principal is treated as if it had communicated any promotion made by its ARs, and must have adequate approval and monitoring processes in place for all AR communications.

The Approver’s Liability

An authorised firm that approves a financial promotion under Section 21 takes on a personal compliance obligation that persists for as long as the promotion is live. Approval is not a procedural step — it is a considered judgment that the promotion meets the fair, clear and not misleading standard in COBS 4.2 and all applicable product-specific conduct requirements.

Critically, the approver cannot disclaim this liability by contract with the unauthorised communicator. A term in an agreement between the approver and the issuer purporting to transfer responsibility for the accuracy of a promotion does not affect the approver’s regulatory position. The FCA’s enforcement focus in approval failures is on the approving firm, not the communicating firm — because the approving firm is the regulated entity.

This personal liability extends beyond the moment of approval. If the circumstances that formed the basis of the approval change — the product’s risk profile shifts, a disclosure becomes inaccurate, the promotion is being used in a context different from that which was approved — the approving firm must review and if necessary withdraw its approval. Failure to monitor live promotions and act on changed circumstances is itself a regulatory failure, distinct from any deficiency in the original approval.

What the Approval Process Must Cover

The FCA does not prescribe a specific approval process, but its guidance and enforcement decisions establish clearly what an adequate process must achieve. The approving firm must understand the investment activity or product being promoted, assess the promotion against the fair, clear and not misleading standard in COBS 4.2, confirm that all mandatory disclosures are present and accurate, and document its conclusions in a form that demonstrates the basis on which approval was given.

For complex or high-risk products — unregulated collective investment schemes, speculative unlisted bonds, high-risk investment products within the meaning of COBS 4.12 — the FCA expects a heightened level of scrutiny proportionate to the risk. A promoter approval process that applies the same level of review to a routine equity investment brochure and to a promotion for a speculative bond is unlikely to satisfy the FCA’s expectations for the latter.

The approving firm must also consider the intended audience. A promotion that is clear and balanced for an experienced investor may be misleading or insufficiently prominent in its risk warnings for a retail customer with limited investment experience. Where the intended audience for a third-party promotion includes retail customers, the approving firm should verify this explicitly and apply the COBS 4 retail communication requirements accordingly.

Due Diligence on the Issuing Firm

Before approving a promotion for an unauthorised third party, an authorised firm should carry out due diligence on the issuing firm as well as the promotion itself. The FCA’s expectations include understanding the issuer’s business, the product being offered, the regulatory basis on which the issuer operates and whether the issuer has previously been subject to FCA alerts, warnings or enforcement action.

Firms that approved promotions without conducting adequate due diligence on the issuer — particularly in markets for mini-bonds and speculative alternative finance products — featured prominently in FCA enforcement during the period 2019 to 2023. Several firms had their gateway applications refused or found that the FCA’s supervisory scrutiny of their approval activities escalated following approval of promotions for issuers that subsequently failed.

Where an approving firm has concerns about an issuer — its business model, the claims made in a proposed promotion, or the risk profile of the product — the appropriate response is to decline to approve, not to approve on the basis that the issuer bears ultimate responsibility for the promotion’s accuracy.

Ongoing Monitoring and Withdrawal of Approval

COBS 4.10 requires authorised firms to take reasonable steps to ensure that financial promotions they have approved remain fair, clear and not misleading for as long as those promotions are live. This creates an active monitoring obligation that goes beyond the point of approval.

In practice this means firms holding gateway permission should have a process for: tracking which promotions they have approved and where those promotions are being used; receiving notifications from issuers when material changes occur to the product, the offer terms or the target audience; reviewing live promotions periodically for continued compliance; and withdrawing approval promptly when circumstances change.

Withdrawal of approval should be formal and documented. Where the approving firm becomes aware that a promotion it has approved is being used in a context not covered by the original approval — for example, being distributed to a wider audience or through a channel different from that reviewed — it should withdraw approval and, where the promotion is actively misleading, consider whether to report the matter to the FCA.

Record Keeping for Section 21 Approvals

The record-keeping obligations for Section 21 approvals are set out in COBS 4.11. Approving firms must retain records showing: the identity of the individual who carried out the approval; the date of approval; the content of the promotion as approved; the basis on which approval was given; the date on which approval was withdrawn, if applicable; and the reasons for withdrawal. These records must be retained for at least three years, or longer where required by other applicable rules.

The FCA expects records to demonstrate the substance of the approval decision, not merely its existence. A record that states “approved — compliant with COBS 4.2” without any analysis of how that conclusion was reached does not adequately evidence an approval process. Records should show the questions asked, the information reviewed and the conclusions reached on each aspect of the COBS 4 assessment.

FCA Enforcement and Supervision

The FCA’s enforcement activity in the Section 21 space has increased materially since the introduction of the gateway requirement. Firms operating without gateway permission that continue to approve third-party promotions face enforcement risk. Firms with gateway permission that approve promotions without adequate process face supervisory scrutiny and — in cases of systemic failure — enforcement action.

Under the SMCR, the senior manager responsible for the financial promotions approval function at a gateway-permission firm carries personal accountability for the adequacy of that function. Where approval failures are identified by the FCA, it will examine whether the responsible senior manager had adequate oversight of the process and took appropriate action when concerns were identified.

Key FCA References

• Section 21 FSMA 2000 — the financial promotions restriction
• FCA Handbook COBS 4 — Communicating with clients including financial promotions
• FCA — Approving financial promotions: the Section 21 Gateway