Head of Financial Services Nigel Brahams offers an initial review of the FCA’s new rules regarding the marketing of cryptoasset products.

Since yesterday, 8 October 2023 all firms marketing cryptoassets to UK consumers, including firms based overseas, have been required to comply with the UK’s financial promotion regime, which has just been extended to cover cryptoassets.

The UK Government’s stated aim is to make the UK a global crypto hub. The FCA’s and the UK Government’s thinking is that sensible regulation will promote ethical businesses and protect vulnerable investors. Are they right? Is issuing 146 warning notices on day 1 the best way to achieve this? Some questions and answers.

– What is a financial promotion? It is an invitation or inducement to engage in investment activity which could have an effect in the UK.

– How are financial promotions regulated? The Financial Services and Markets Act 2000 (FSMA) provides that a person must not in the course of business, communicate a financial promotion (from inside or outside the UK) , unless the promotion has been made or approved by an authorised person or is exempt.

– What is an authorised person? An UK person means a firm authorised by the Financial Conduct Authority (FCA) to conduct investment services.

– What requirements apply to financial promotions? The FCA’s Conduct of Business (COB) Rules require that all financial promotions must be clear, fair and not misleading.  However, a communication to a retail customer requires greater disclosure and explanation.

– Real time vs. non-real time financial promotions. Financial promotions can be real time or non-real time.  A real time financial promotion means a live meeting or telephone call where A attempts to sell B some form of financial service or product. Cryptoassets are almost always promoted via direct offer non-real time financial promotions, such as websites, mobile apps, social media posts and online advertising .

– What cryptoassets are covered by the new rules? The UK Financial Promotion Order (FPO) defines a “cryptoasset” as “any cryptographically secured digital representation of value or contractual rights that: (a)   can be transferred, stored or traded electronically, and (b)   uses technology supporting the recording or storage of data (which may include distributed ledger technology);” The FPO defines a ‘qualifying cryptoassets’ as a cryptoasset which is transferable and fungible (i.e. interchangeable as per cash) – this includes BTC, Ether, Tether etc; but not NFTs (which by their nature are unique and non-fungible). Also excluded are crypto products which are already covered by the existing FCA regulatory framework, i.e. “electronic money” or “controlled” investments, , i.e. deposits, equities, futures, fund units. etc.

– What are the consequences of the new rules? Firms wishing to issue financial promotions of cryptoassets to consumers must either be: (a) FCA Authorised themselves; (b) have their financial promotion approved by an FCA authorised firm; or (c) be exempt – because they are registered with the FCA under the recently amended Money Laundering Regulation, which also captures activities in relation to crypto assets.

– Health Warnings & Cooling Off Period Any firm promoting or endorsing cryptoassets is now required to ensure that potential buyers have the appropriate knowledge and experience to invest in crypto.All promotions must contain clear risk warnings. Products targeted at retail customers, must contain a range of mandatory health warnings. The following is an example taken from the FCA’s COB rules:Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong.One much trailed change is the introduction of a 24-hour one off cooling off period which applies the first time a consumer requests to view a Direct Offer Financial Promotion of cryptoassets from a specific firm.

So, will all these changes produce a more open, bigger, longer lasting and better regulated UK cryptoasset market or have the Government and FCA played to the “something must be done” audience and unwittingly driven crypto off-shore? Is 146 warning notices, 145 too many?

There is no doubt that good regulation is good for business and that well regulated markets create confidence. There is also little doubt that some unprofessional and unethical operators (i.e. FTX) have operated in the cryptomarkets and that the practices of some operators still fall below those of established financial markets.

The FCA has a duty to protect both ordinary investors but at the same time to support the crypto industry. Regulatory certainty is better than chaos. However, it may be difficult to find sufficient authorised firms who are prepared to endorse crypto adverts and promotions for unregulated firms. Whilst firms can get FCA registered for AML, this is not a simple or quick process and raises the barriers to entry to the UK market to the well funded. However, registered firms do not have to comply with the FCA’s principles, meaning that their customers are not protected from unethical and opaque practices.

Overall, the reforms are a next step on a journey the final destination of which will be classifying cryptoassets as investments under FSMA and making cryptoasset firms subject to the same rules as conventional financial services firms. We’re not quite ready for that, but in my view the latest reforms are overall a step in the right direction and at the right time. Hopefully, the next 24 hours won’t feature quite the same volume of warnings!

For more information, please visit our Financial Services page.