What is the difference between an exclusion and an exemption?

Why does the difference matter?

The three terms are often used as if they meant the same thing. They do not. They are found in different pieces of legislation, they have different effects and they come with different conditions. A business that confuses them can end up relying on the wrong one, for example treating a marketing exemption as if it took the whole business outside the perimeter.

What is an exclusion?

The Regulated Activities Order (RAO) defines each regulated activity in its own article. Many of those articles are followed by exclusions, which describe situations where something that would otherwise fit the definition is treated as not being that regulated activity. Some exclusions apply to one activity only. Others apply across several.

Where an exclusion applies, the activity is outside the perimeter for that purpose, so the general prohibition in section 19 of the Financial Services and Markets Act 2000 (FSMA) does not apply to it. Exclusions are read strictly. Each has its own conditions, and if one condition is not met the exclusion does not help.

A common example is the introducing exclusion in article 33. Arranging deals in investments is a regulated activity under article 25. Article 33 excludes some introductions, but only introductions made with a view to independent advice or the independent exercise of discretion, mainly to authorised or exempt persons and certain other investment firms. An introduction to a firm that will simply sell its own product is not what that exclusion describes. How exclusions work

The payments and e-money regimes sit outside the RAO and have their own exclusions. The Payment Services Regulations 2017 list activities that are not payment services, including the commercial agent exclusion and the limited network exclusion. A business relying on the limited network exclusion must notify the FCA once its payment transactions exceed €1 million in a 12 month period.

What is an exemption?

Exemption is used in two main ways that matter here.

Financial promotion exemptions

Section 21 of FSMA restricts who can communicate a financial promotion in the course of business. The Financial Promotion Order (FPO) sets out exemptions from that restriction. If an exemption applies, an unauthorised business can communicate the promotion without it being made or approved by an authorised firm. Well known examples include communications to investment professionals under article 19, to high net worth individuals under article 48 and to self-certified sophisticated investors under article 50A.

These exemptions apply to the communication, not to the business. They do not make the activity being promoted unregulated, and they usually depend on who the communication is directed at, what it says and the statements or checks that go with it. The main promotion exemptions

Exempt agreements

In consumer credit, article 60B of the RAO makes entering into a regulated credit agreement as lender a regulated activity. Article 60C is one of the provisions that make certain agreements exempt, which means they are not regulated credit agreements. One of the most used exemptions is for credit of more than £25,000 that the borrower takes wholly or predominantly for the purposes of their business. If an agreement is exempt, lending under it is not the article 60B activity. The effect is close to an exclusion, but it works by taking the agreement out of the definition rather than by carving out the activity.

What is an exempt person?

Section 19 allows a regulated activity to be carried on by an authorised person or by an exempt person. An exempt person is still carrying on a regulated activity. The law simply allows them to do it without their own authorisation, and only for the activities the exemption covers.

The most common example is an appointed representative under section 39 of FSMA. An appointed representative has a contract with an authorised principal and is exempt for the business the principal has accepted responsibility for in writing. The principal is responsible for what the appointed representative does in that business, and the FCA’s rules for principals are in SUP 12 of its Handbook. Appointed representative or authorisation

Section 38 of FSMA allows HM Treasury to make exemption orders. The order made under it lists particular kinds of body that are exempt for particular activities. Being exempt for one activity does not make a body exempt for others.

How do they compare?

Operations and marketing

Exclusions, exempt agreements and exempt persons belong to the operations test under section 19. Financial promotion exemptions belong to the marketing test under section 21. Relying on one kind does not deal with the other. A lender relying on the business purpose exemption still needs to consider whether its adverts are financial promotions. An appointed representative is exempt for its regulated business but is not an authorised person, so its promotions generally need approval, often from its principal. Since 7 February 2024 an authorised firm generally needs a specific FCA permission to approve promotions for unauthorised businesses, with limited exceptions that include promotions of its own appointed representatives. See the operations test and the marketing test.

Common misunderstandings

When a written opinion helps

If your business model relies on an exclusion, an exempt agreement or a promotion exemption, a written legal opinion tests each condition against your facts, your documents and the way you actually operate. That is the part this page cannot do. It also gives you something to show a bank, investor or partner who asks how you know the exclusion or exemption applies. How written opinions work