The FCA is set to introduce new Financial Promotions Rules for Cryptoassets
In a significant move for the cryptoasset market, the UK Parliament passed an amendment to the Financial Services and Markets Act 2000 on 7th June 2023. This legislation, known as the Financial Promotion (Amendment) Order 2023, extends the existing regulations for marketing financial products to include cryptoassets. Coming into effect on 8th October 2023, the amendment will transform how cryptoassets are advertised and promoted in the UK.
Effective from this date, these new rules will require cryptoasset firms, including those based outside the UK, to reassess their marketing strategies within the country. The FCA is also consulting with the industry to draft additional guidelines to ensure that financial promotions related to cryptoassets remain fair, clear, and not misleading.
Financial Conduct Authority’s Approach to Cryptoasset Promotions
A day after the parliamentary decision, the Financial Conduct Authority (FCA) released its final rules regarding cryptoasset promotions through Policy Statement PS 23/6. The formal inclusion of cryptoassets in the financial promotions framework aligns with the UK government's ambition to position the country as a cryptoasset hub while maintaining robust consumer protection measures.
Understanding the Financial Promotions Restriction
Under Section 21 of the amended act, the UK's Financial Promotions Restriction broadly limits the marketing and communication of investment activities unless:
The marketing firm is authorised by the FCA; or
The communication has been approved by an FCA-authorised entity; or
The marketing or communication falls within specific exemptions to the Financial Promotions Order (FPO).
A "financial promotion" in this context includes any online or offline invitation or encouragement to engage in investment activity. Compliance with these rules applies at every stage of communication, including hyperlinks and other pathways leading to further information about cryptoassets.
Inclusion of Cryptoassets in the Financial Promotions Order
The amendments under PS 23/6 define a "cryptoasset" as a cryptographically secured digital representation of value or contractual rights. A “qualifying cryptoasset” must be fungible and transferable, excluding specific categories like non-fungible tokens (NFTs), except under certain conditions.
These changes also allow cryptoasset firms not formally authorised in the UK, but registered with the FCA for anti-money laundering supervision, to issue or approve financial promotions. While this may seem like a significant change, practical implications might be minimal due to the small number of firms currently registered with the FCA and the potential reluctance among other authorised firms to approve promotions from cryptoasset companies.
Challenges for Cryptoasset Firms
The amendments bring several challenges, as many cryptoasset firms have struggled to gain FCA registration. Firms within the scope of the Financial Promotions Restriction may have to limit or modify their promotions to comply with the new rules or target recipients within specific exemptions. The Financial Promotions Order includes exemptions for:
Financial institutions
Entities meeting certain size requirements
High-net-worth individuals
Designated sophisticated investors
New requirements for Crypto-assets financial promotions
In alignment with the amendments, the FCA revised its financial promotions rules, classifying cryptoassets as Restricted Mass Market Investments (RMMIs). As a result, promotions related to cryptoassets must adhere to a set of new requirements. Below is a summary of the new key standards.
1. Include risk warning and “Take 2 min to learn more” risk information
Based on the responses to DP 21/1 and the FCA's behavioural testing, the FCA has mandated that all financial promotions for ‘Restricted Mass Market Investments’ include the specified risk warning, in accordance with the prescribed format requirements. In addition, the FCA requires to include “Take 2 min to learn more” risk information to be presented in a pop-up box when a consumer click on the link in the risk warning.
2. Refrain from offering monetary or non-monetary investment incentives
The FCA sets out new rules that would prevent firms from providing any monetary or non-monetary benefits that might encourage investment activities. This would include common incentives like "refer a friend" bonuses or rewards for new members, as well as offers where a customer is given 'free' or 'extra' cryptocurrency. Firms will need to reconsider how they engage in promotional activity such as AirDrops.
The FCA has outlined the rationale for this proposal, pointing to evidence that incentives can unduly affect consumers' investment choices, leading them to invest without fully understanding the risks.
3. Direct Offer Financial Promotions (DOFPs) rules and 24-hour cooling-off period
In circumstances where a first-time customer asks to see a "Direct Offer" financial promotion (DOFP), the FCA proposes to enforce a 24-hour cooling-off period from the moment of the request until the DOFP can be provided to the customer. This rule is designed to add an extra layer of protection before the consumer commits to investing their money. The FCA cites an example of a DOFP as a promotion that includes a "buy now" button, facilitating immediate investment.
Throughout the cooling-off duration, firms will be required to supply the customer with a personalised risk warning, and they may continue with other aspects of the customer process, such as KYC/AML checks, client classification, and assessing the appropriateness of the investment. Once the cooling-off period concludes, the customer will be required to provide their 'active consent' to move forward with the investment.
The FCA’s intention is to reduce pressure-selling techniques, which rely on FOMO to heard investors into potentially unsuitable investments.
4. Appropriateness assessments
The FCA is proposing to introduce guidance on the types of questions that should be covered by appropriateness assessments for all other 'Restricted Mass Market Investments,' similar to the guidance related to Peer-to-Peer (P2P) lending. This new guidance will not be an exhaustive list dictating what must be included in an appropriateness assessment. Firms will need to create substantial and effective assessments, considering the characteristics and risks of the investments they offer, possibly including topics not covered in the guidance.
The FCA is also proposing a rule that if a cryptoasset investment is evaluated as inappropriate for a consumer, the firm cannot reassess the suitability of that investment for the same client for at least 24 hours. This proposal aims to assist investors influenced by social or emotional factors, ensuring they take time to contemplate their decisions and comprehend the risks before proceeding. This will require firms to implement potentially complex operational changes to their sales processes.
5. Record-keeping requirements
To monitor the impact of the changes, the FCA proposes that firms collect data to assess the outcomes of these proposals. The required data includes insights on whether consumers continue to access the investment following each intervention, their interaction with risk warning links, and the results of appropriateness evaluations and client categorisations. The FCA expects firms to be capable of providing this information when requested, in line with existing regulations (SUP 2.3.3 G).
What does the amended FPO mean for crypto firms?
The net effect of these requirements will be a substantial operational burden on firms engaging in financial promotions of cryptoassets. The emphasis on measurement and recordkeeping demonstrates how the FCA’s “data-driven” approach is evolving following the implementation of the new Consumer Duty.
Crypto firms operating in the UK will need to understand the impact of the new rules on their business strategies and customer journeys. Failing to comply with the rules will be regarded as a breach of the financial promotion restrictions and could result in criminal action being undertaken against actors not complying with the rules.
The new rules make the UK one step closer to a more comprehensive regulatory regime for crypto-assets. Whilst we will need to wait for the implementation of MiCA in the EU to see any “Brussels-effect” on the UK regulatory framework, the amended financial promotions rules set a clear tone that the FCA will be taking a robust approach towards regulating crypto-assets.
Please contact us if you’d like to discuss how the new rules impact your business.