From October this year, businesses wanting to market cryptoassets to UK customers will be subject to demanding new restrictions.
Over recent years, UK consumers have begun to invest more widely in cryptoassets, often tempted by potentially unclear or misleading claims made in social media or other marketing materials. Some consumers do not understand the risks involved in volatile cryptoasset investments and may not be able to afford to lose the money which they invest.
To help protect these consumers, the UK government has legislated to bring ‘cryptoasset financial promotions’ under financial services regulation. The Financial Conduct Authority (FCA) has responded by announcing a package of new rules for businesses marketing cryptoassets. The new rules restrict the type of businesses allowed to issue cryptoasset financial promotions in the UK and set tough new quality standards for cryptoasset marketing materials.
If your business is involved in UK marketing of cryptoassets, you should make sure you understand these new financial promotions requirements and how they impact your business. Harper James’ financial services solicitors are expert in the regulatory requirements applying to UK financial promotions, including the new regime for cryptoasset financial promotions, and can advise on how best to navigate the regime.
Contents:
- What type of marketing is covered by new rules for ‘cryptoasset financial promotions’?
- Which businesses will be allowed to issue cryptoasset financial promotions?
- What exemptions are available?
- What new standards will apply to cryptoasset financial promotions?
- Is there anything else my business needs to think about when implementing this new regime?
- How do the new rules for cryptoasset financial promotions fit with rules for marketing of other high-risk investments?
- What are the consequences if my business does not comply with the new regime for cryptoasset financial promotions?
- Conclusion
What type of marketing is covered by new rules for ‘cryptoasset financial promotions’?
The new FCA regime is aimed at cryptoasset financial promotions targeting UK customers. This includes financial promotions disseminated through any technology by both UK and overseas businesses.
A financial promotion is an ‘invitation or inducement to engage in investment activity’. Financial promotions can include communications to customers or prospective customers via a wide range of marketing media such as mailshots, newspaper adverts, websites, Facebook posts, tweets and so on. To count as a financial promotion, marketing material must include some element which can be seen as inviting or inducing a customer to take a tangible step towards transacting in a particular financial product.
The FCA’s new rules apply to financial promotions for ‘qualifying cryptoassets’. This broadly covers most cryptoassets which have until now been outside the regulatory regime for financial promotions. It excludes cryptoassets which are already caught by existing financial promotion rules as either investments or electronic money.
Which businesses will be allowed to issue cryptoasset financial promotions?
From 8 October 2023, the new FCA regime prohibits you from issuing cryptoasset financial promotions, unless:
- Your business is authorised by the FCA
- Your business is registered with the FCA under the Money Laundering Regulations
- Your promotion has been approved by an FCA-authorised firm
- You benefit from a specific exemption.
So, if you are not authorised or registered, you will usually need to arrange for another FCA-authorised firm to check and formally approve any marketing materials for cryptoassets before you use them. The approving firm will help to make sure that your promotions comply with new regulatory standards for cryptoasset marketing materials. Authorised firms are likely to charge you for providing this approval.
Currently any FCA-authorised firm can approve a financial promotion for an unauthorised or unregistered business. The FCA has consulted on introducing a new ‘gateway’ for authorised firms who wish to approve promotions for other businesses. This is intended to improve the quality of promotions which reach customers. However, it may mean that it will be harder or more expensive to find an authorised firm to approve your financial promotion in future.
Financial businesses which are authorised as electronic money or payments services firms under related regulations are not treated as FCA-authorised firms under these financial promotion rules. So these firms will not be allowed to issue their own cryptoasset financial promotions or approve them for other businesses.
What exemptions are available?
The wider UK financial promotions regime offers a range of specific exceptions which apply in limited circumstances. The availability of exemptions differs depending on the type of financial product or service being marketed, the type of customer being targeted and the medium in which the promotion is made.
Whilst some of these general exemptions will also apply to the new cryptoasset financial promotions regime, the UK government has chosen to disapply certain exemptions to enhance consumer protection for prospective cryptoasset investors. In particular, businesses marketing cryptoassets will not be allowed to use exemptions which lower protection for high net worth investors or for investors who certify themselves as ‘sophisticated’.
The conditions for exemptions under the financial promotions regime are complex and can be difficult to interpret. If you do not have FCA authorisation or registration and are looking to rely on an exemption to launch a cryptoasset marketing programme without asking an FCA-authorised firm to assist you, you should take legal advice at an early stage to ensure you can meet all the relevant exemption criteria.
What new standards will apply to cryptoasset financial promotions?
The new regime for cryptoasset financial promotions also involves the introduction of rigorous consumer protection measures. These requirements are designed to improve customer understanding of the risks associated with investing in cryptoassets and to introduce additional safeguards into the customer journey. The new measures include:
- Display of prominent mandatory risk warnings, including links to an expanded summary of risks for the specific product being promoted
- Banning incentives for investing in cryptoassets such as free gifts, initial bonuses or ‘refer a friend’ schemes
- Introducing a ‘cooling off period’ and a personalised pop-up risk warning before first time investors part with their money for financial promotions which incorporate an application or response form
- Ensuring firms allocate each customer to an appropriate customer category and make an ‘appropriateness assessment’ to decide whether a cryptoasset investment is likely to meet the customer’s needs
- Asking firms to keep detailed records to monitor compliance with the regime and allow better evaluation of consumer outcomes under the new standards.
Many of the new requirements incorporate standardised wordings or specific minimum standards. These prescriptive rules may be resource-intensive for businesses to absorb and implement. Implementation is more challenging because there is just 4 months for businesses to prepare before the new rules come into effect.
Our financial services solicitors are ready to support you in getting to grips with the new regime and ensuring that you comply with rules on cryptoasset financial promotions.
Is there anything else my business needs to think about when implementing this new regime?
Yes. Alongside publishing these new rules for cryptoasset financial promotions, the FCA is also consulting on new guidance which will give further detail on good and poor practice and how the FCA expects firms to approach implementation. You should ensure that you carefully consider this proposed guidance and understand any impacts for your business.
How do the new rules for cryptoasset financial promotions fit with rules for marketing of other high-risk investments?
When looking at marketing standards for consumer investments, the FCA groups investments into 3 main categories. These are:
Mass market investments (MMI): mainstream consumer investments which are not subject to marketing restrictions e.g. listed or exchange-traded securities.
Restricted mass market investments (RMMI): higher risk investments which can be marketed to retail customers but where restrictions on marketing are appropriate for consumer protection reasons.
Non-mass market investments (NMMI): the highest risk investments which should not be marketed to ordinary retail customers.
The FCA has decided that cryptoassets should be categorised as RMMI. This is on the basis of features of the cryptoasset market which include sudden price drops, incidences of cryptoasset businesses failing, likelihood of scams, poor control of client assets by cryptoasset businesses and cyber risks. The FCA is therefore seeking to align its regulation of cryptoasset financial promotions with similar rules applying to financial promotions for other RMMI.
For more information about the FCA rules which set standards for marketing of higher-risk RMMI investments, please read our knowledge article ‘Marketing high-risk investments: what do recent changes mean for you?’.
What are the consequences if my business does not comply with the new regime for cryptoasset financial promotions?
Any business which issues a financial promotion without appropriate authorisation or registration is committing a criminal offence. The offence attracts a penalty of an unlimited fine and/or 2 years in prison.
The FCA has also made clear that it intends to take robust action where the standards it expects for cryptoasset financial promotions are not met. Potential regulatory action includes asking firms to take down non-compliant marketing posts or websites, making businesses subject to more intensive FCA supervision, placing restrictions on firms to prevent harmful promotions and, in the more serious cases, launching a formal enforcement investigation. If a breach of rules is proven, an FCA investigation can lead to public censure, fines or restrictions on a firm’s ability to do business going forward.
Conclusion
The new FCA regime for cryptoasset financial promotions is a step change for consumer protection when cryptoassets are marketed to UK customers. Firms marketing cryptoassets in the UK will need to respond quickly to implement the new regime by the October 2023 due date.
Breaching these new cryptoasset financial promotions rules, even inadvertently, could cause serious problems for you and your business. Make sure you understand the rules and guidance for cryptoasset financial promotions and can comply by the due date.
Harper James’ financial services solicitors are on hand to assist with tailored advice on these new requirements and how your business can implement them effectively.
