Financial Conduct Authority introduces new financial promotions rules for cryptocurrencies
Some might say the FCA is late to the party, but there was a certain sense of inevitability when, in June 2023, the FCA announced its plans to bring cryptoassets within scope of the UK’s financial promotions regulatory regime.
Whilst the announcement was no great shock, what is surprising is the speed with which this is happening – the new financial promotions rules will come into effect from 8 October 2023.
The FCA’s stated ambition in introducing the new cryptoasset financial promotions regime is to ensure that consumers “…only invest in cryptoassets where they understand the risks involved and can afford to absorb potential losses.”
What are financial promotions?
A financial promotion is defined as a communication, made by a person in the course of business, which serves to invite or induce someone to engage in investment activity (which itself covers a wide range of FCA-controlled activities, such as accepting deposits, managing investments, debt-adjusting, and insurance contracts). A television advert encouraging viewers to invest in shares, or to secure a credit agreement, would be an example of such a promotion. Under the existing rules, these types of promotions can only be made by a person or firm which is authorised by the FCA, where the promotion is formally approved by an FCA-authorised firm or in accordance with limited exemptions.
In the world of cryptoassets, promotions are quite common – celebrity influencers are particularly common, with certain businesses and exchanges hiring well-known actors to encourage customers to invest in crypto. Global sports events are also a common source of crypto promotions, with the 2022 Super Bowl being a particularly notable example.
In the UK, cryptoassets currently operate in a largely unregulated space, meaning that businesses operating within the sector have greater freedom to promote these assets as they see fit, without being subject to the same controls and rules which FCA-authorised firms in the financial services sector are bound to follow. The new rules, however, look set to change this.
What problems have the FCA identified?
The UK is moving towards the introduction of a full regulatory framework for cryptocurrency and digital assets, and it is expected that the FCA will be responsible for day-to-day regulatory oversight. The FCA is actively working internally to develop future policies and frameworks, and various consultations and reports have been issued by different groups and organisations (including within the crypto industry itself), all of whom are seeking to have an input and assist the FCA and government with developing their plans.
The new financial promotion rules are perhaps an early indicator of how the FCA currently views cryptoassets and its attitude towards how the industry operates.
In its draft guidance, the FCA highlighted some of the key failings identified with current cryptoasset financial promotions:
- In respect of promotions relating to stablecoins:
“We continue to see very poor-quality promotions for this type of cryptoasset. Financial promotions will often claim the cryptoassets are ‘stable’ or represent a ‘store of value’ with little to no evidence or explanation behind these claims, such as supporting detail around how stability is achieved or the nature, or value, of any backing assets. Where an explanation is provided, it is often unclear or difficult for a consumer to understand. This can lead to poor investment decisions with consumers investing in cryptoassets which have no realistic prospect of maintaining stability.”
- In respect of promotions relating to commodity-linked cryptoassets:
“Promotions are often unclear as to how the particular cryptoasset operates, such as tracking or referencing the price of the commodity or acting as a digital record of ownership. The relationship between the underlying commodity and the issued token is often unclear. Promotions also often include bold claims around ownership and wealth protection with little evidence to support these claims.”
- In respect of promotions relating to complex yield cryptoasset models or arrangements (such as staking):
“Many of these promotions are of very poor quality. Promotions often advertise very high rates of return of up to 30%, with little to no evidence of whether the rate can be achieved or the evidence used to calculate these rates. Promotions are often unbalanced, using exaggerated claims about the benefits of these models/arrangements with little description of the risks. The information on the legal and beneficial ownership of the cryptoasset once these arrangements/models are entered is also often unclear.”
The FCA has been clear that the financial promotion rules and its proposed guidance are “technology neutral” and it very much has social media in its sights, which should be a wake-up call to influencers promoting cryptoassets and cryptoasset-related investments.
Categorisation for financial promotion purposes
Under the new rules, “qualifying” cryptoassets will be categorised as Restricted Mass Market Investments (“RMMIs”). This puts them in the same category as shares in private limited companies or bonds issued by private limited companies. As an RMMI, cryptoassets can be marketed to UK consumers subject to certain restrictions, in addition to the overarching requirement that financial promotions must be fair, clear and not misleading. The restrictions proposed include – clear risk warnings, banning incentives to invest, positive friction, client categorisation requirements and appropriateness assessments.
The FCA has said that it believes it is appropriate to categorise cryptoassets as RMMIs because it believes:
“… the specific restrictions placed on the promotion of these investments, in particular that ordinary retail investors confirm that they will limit their exposure to such investments to no more than 10% of their net assets and that the investment must be considered appropriate for them, remain relevant for the risk posed by a wide range of cryptoassets.”
For the purposes of the new rules, “qualifying” cryptoassets are defined in a new provision in the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”) as being “…any cryptographically secured digital representation of value or contractual rights that is transferable and fungible, but does not include cryptoassets which meet the definition of electronic money or an existing controlled investment.”
Routes to promote cryptoassets
The new rules provide for four routes to promote cryptoassets:
- The financial promotion can be communicated by an FCA-authorised person;
- The financial promotion can be made by an unauthorised person but approved by an authorised person;
- The financial promotion can be made pursuant to an existing exemption in the FPO; and
- A new exemption has been introduced into the FPO for cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. This bespoke exemption, enables such businesses to communicate their own cryptoasset financial promotions to UK consumers. It is important to note that this exemption only allows businesses to communicate financial promotions, they cannot approve promotions for others to communicate. In addition, the businesses cannot rely on the exemption to communicate promotions relating to other controlled investments.
A new cooling off period & personalised risk warning
Where a first-time customer requests sight of a “Direct Offer” financial promotion or DOFP (adopting the FCA abbreviation), a 24-hour cooling off period will apply from the time of the request before the customer can receive the DOFP. The aim is to ensure that extra protections are in place before the consumer can take a crucial step towards placing their money in an investment. The FCA gives an example of a DOFP as being a promotion containing a “buy now” button enabling the customer to invest.
During the cooling off period firms must provide the customer with a personalised risk warning and they can proceed with other parts of the customer journey – e.g. KYC/AML checks, client categorisation and the appropriateness assessment. At expiry of the cooling off period, the customer will need to give their ‘active consent’ to proceed with the investment.
Removing incentives to invest
The FCA has confirmed that the new rules will ban firms from offering any monetary or non-monetary benefits which incentivise investment activity. This includes incentives such as “refer a friend” rewards, or new joiner bonuses. This also includes any incentives where a customer is offered ‘free’ or ‘extra’ cryptocurrency as a reward, e.g. for referring a friend.
The FCA explained the reasoning for this decision as due to the belief that “incentives to invest can unduly influence consumers’ investment decisions and cause them to invest without fully considering the risks involved”, and highlighted that social and emotional factors can have a “powerful impact” on individuals’ investment decisions.
What does this mean for crypto firms?
In light of the release of these new rules, crypto firms operating in the UK will need to take steps to fully familiarise themselves with the rules and requirements the FCA is introducing for crypto promotions, and will need to carefully revisit their business strategies to ensure compliance with the new rules. Failing to comply with the rules may result in a breach of the financial promotion restriction, which prevents unauthorised firms and individuals from communicating such promotions, and which could result in criminal action being pursued against those breaching the rules.
In terms of consumers, the rules look to provide them with improved protections, particularly owing to the introduction of a cooling-off period. However, it is important to note that the new rules do not bring cryptocurrencies within the remit of the Financial Services Compensation Scheme, meaning that consumers and investors will still have very limited means of redress if the investment should fail. So, whilst the new rules do offer further protection and impose a higher burden on crypto firms, it still remains an area which consumers should treat with caution.
Taken as a whole, the new rules signify that we are now one step further forward towards seeing a full regulatory regime for cryptoassets in the UK. They are an early indicator of the FCA’s approach towards these assets, and give an indication as to what the future regulatory approach may be – namely, the FCA will be taking a robust approach and treating cryptoassets with the same level of seriousness as it does with other financial products.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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