This article provides an overview of the main topics covered by the FCA's policy statement on cryptoasset financial promotions. The overriding obligation is that any financial promotion must be fair, clear and not misleading.
Alongside this policy statement, the FCA is consulting on guidance to clarify further the requirement that financial promotions of cryptoassets be fair, clear and not misleading in GC23/1 – Guidance on cryptoasset financial promotions.
Finally, this piece offers insights into the upcoming changes and their implications for cryptoasset firms operating in the UK market.
A new FCA policy statement affecting cryptocurrencies
Last week – on June 8 – the FCA published Policy Statement PS23/6 – Financial promotion rules for cryptoassets.
This is done at a time when regulators around the world are variously:
Enacting rules, if even piecemeal, covering the nascent crypto/digital/virtual asset space
Creating unfriendly environments for such businesses
Waiting on the sidelines and watching as others enter the fray
The FCA, PRA and HM Treasury fall into the first bucket. We’re thankful for their approach – even though it is measured and not quite at the forefront like:
That said, all progress should be acknowledged.
Crypto market overview
Let’s put these new rules into context. According to Coinmarketcap.com (the FCA quotes them as well in PS23/6):
The market cap of the global cryptocurrency market on 14 June 2023 was USD1.06 trillion. For those of us in the UK, that market cap is ½ of the FTSE100 market cap. Remember the cryptocurrency market didn’t even exist 15 years ago.
Over 25,000 cryptocurrencies are available to trade.
Over 600 crypto exchanges.
The crypto market’s rate of growth is phenomenal. It needs smart regulation as that growth continues in order to protect consumers from harm and ensure innovation can thrive. These new rules are a step in the right direction.
Introduction
This particular policy statement introduces new rules and guidance for the marketing of cryptoassets to UK consumers. The policy was published on 8 June 2023 and is expected to come into force on 8 October 2023. Four months is an aggressive timetable and firms need to act now.
Under PS23/6, cryptoassets are categorised as Restricted Mass Market Investments (RMMI) and deemed high-risk investments.
The FCA's new rules and guidance apply to any firm marketing such high-risk cryptoassets to UK consumers. This is regardless of whether the firm is based in the UK or overseas. The FCA's definition of financial promotion is broad. It includes websites accessible to UK consumers and social media targeted at UK consumers. The FCA goes into detail on “the consumer journey” rules pertaining to:
Risk warnings and risk summaries
Ban on incentives to invest
Direct offer financial promotions
Client categorisation
Appropriateness assessment
24-hour cooling-off period
Record keeping
Note: the rules in the table below are only relevant where a firm communicates or approves a financial promotion to a retail client.
Summary of the main topics under the consumer journey
The final rules and guidance largely align with the proposals set out in the initial FCA consultation published in January 2022 and the subsequent policy statement published in August 2022. These documents provide a comprehensive summary of the requirements. This policy statement very helpfully points out where it differs from the proposals in the two 2022 documents.
Please find a summary of the main topics relevant to the consumer journey below:
Topic | Rule and practical implications |
Four communication avenues | Re cryptoasset promotions to UK consumers, there are four avenues under the new regime, i.e., a financial promotion can only occur one of four ways:
|
Risk warnings and associated risk summaries | The risk warning (shorter in length) and risk summary wording (more detailed but should take about 2 minutes to read) must state that consumers should not expect to be protected by the Financial Services Compensation Scheme or the Financial Ombudsman Service if something goes wrong with their cryptoasset investments.
Firms must make an adequate record of any divergence from the FCA’s template risk warning and the rationale behind any change.
Firms can direct consumers to non-digital risk summaries in certain circumstances. Firms will need to update their websites with linked risk summaries and draft them in plain English, bearing mind the relevant prominence of such summaries. |
Ban on incentives to invest | The shareholder benefit exemption that applies to other investment products will not apply to financial promotions of cryptoassets.
So, no incentives such as “refer a friend” or new joiner bonuses. |
DOFP | A direct offer financial promotion arises where the financial promotion specifies the manner of response or includes a form by which any response may be made. Anything that promotes an investment and contains a mechanism which enables consumers to place their money in that investment is likely to constitute a DOFP.
Risk warnings will probably necessitate the provision of a risk summary. Therefore, firms may find digital-only financial promotions easier to track. Firms using non-digital financial promotions would need to consider how to provide risk summaries. |
Client categorisation | Before a DOFP can be made in relation to an RMMI, the consumer must be categorised as a Restricted, High Net Worth or Certified Sophisticated Investor. This requires the investor to sign a declaration stating that they meet the relevant criteria to be categorised as such. The declaration is valid for 12 months. |
Appropriateness assessment | Before an application or order for an RMMI can be processed in response to a DOFP, the firm must assess the specific RMMI as appropriate for the consumer. |
24-hour cooling-off period | A 24-hour cooling-off period will be implemented. It starts from when the consumer requests to view the direct offer financial promotion, i.e., requests to invest. It does not apply on a transaction-by-transaction basis. Firms can proceed with other parts of the consumer journey while the cooling-off period applies. This would be KYC/AML checks, client categorisation and the appropriateness assessment.
Firms will need an auditable system that tracks the consumer journey to time-stamp at least:
|
Record keeping requirements | The record keeping requirements apply to authorised firms communicating financial promotions as well as firms which approve DOFP for RMMI (section 21 approvers). |
The Consumer Duty and other handbook provisions
The Consumer Duty applies to authorised firms communicating or approving cryptoasset financial promotions. More information on the Consumer Duty may be found in prior blog posts:
The FCA has stated that it is “not proposing to apply the Consumer Duty to unauthorised MLR-registered firms communicating their own promotions at this point.” That said, the following does apply to any MLR-registered firm when communicating financial promotions:
Principle 7 (Communications with clients)
Relevant parts of GEN (Statements about authorisation and regulation by the appropriate regulator)
COBS 4 (Communicating with clients, including financial promotions)
COBS 10 (Assessing appropriateness)
Breaches of these rules
Promotions that are not made using one of the four routes will be in breach of section 21 of FSMA. This would be a criminal offence punishable by up to two years imprisonment, the imposition of a fine, or both.
Follow the spirit of the rules
What may seem like back doors (reverse solicitation or registering for the MLRs so you can run financial promotions) will not put your firm in the best light. Basically, don’t try to game the FCA; you won’t win. Applications for MLR registration are more akin to applications for authorisation and they will take into account a firm’s conduct under MLR registration when considering authorisation applications. They don’t look kindly on firms that try to avoid their rules and access UK customers by way of semantic trickery.
Conclusion
While this policy statement is a step in the right direction, we still look forward to clarifications around governance, risk management, operational resilience and custody of crypto/digital/virtual assets in due course.
It is important for cryptoasset firms marketing to UK consumers to prepare for the new financial promotions regime described in PS23/6 entitled “Financial promotion rules for cryptoassets”. Firms should ensure compliance to avoid breaching the requirements and facing robust action from the FCA. The 8 October 2023 go-live date is fast approaching.
Feel free to reach out to us if we can help you navigate the regulatory terrain.
Please note that the information provided above is a summary and for a more detailed and complete understanding, it is recommended to refer to the original documents published by the FCA:
