Following the introduction of UK legislation to bring cryptoassets within the UK's financial promotions regime, the UK's Financial Conduct Authority (FCA) is introducing new rules from 8 October 2023 meaning that cryptoassets will only be able to be marketed to UK consumers (by UK or overseas firms) subject to certain restrictions. All firms promoting cryptoasset products or services to UK consumers should be preparing for the new framework, as the consequences of non-compliance can be significant.
Bringing cryptoassets within the financial promotions regime
The UK's financial promotions regime is set out in the UK Financial Services and Markets Act 2000 (FSMA) and the Financial Services and Markets act 2000 (Financial Promotion) Order 2005 (the FPO). The FPO sets out the various investments ("controlled investments") and related activities ("controlled activities") to which the regime applies. The regime prohibits firms from communicating a financial promotion unless:
- The communication is made by an "authorised person" – i.e. a firm authorised by the FCA under FSMA;
- The communication is approved by an authorised person; or
- An exemption applies.
Breaching this financial promotion restriction is a criminal offence in the UK, punishable by an unlimited fine and/or 2 years imprisonment.
Following its Policy Statement in February 2023 on regulation of cryptoasset promotions, the Government has made changes to UK law via The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the Order). The Order introduces the concept of "qualifying cryptoasset" into the lists of controlled investments and controlled activities in the FPO. A "qualifying cryptoasset" is defined in a new paragraph 26F in Schedule 1 of the FPO and is, broadly, "any cryptographically secured digital representation of value or contractual rights that is transferable and fungible". This wide definition captures many existing cryptoassets – including stablecoins, asset backed tokens, fan tokens and cryptocurrencies such as Bitcoin and Ether – but does not include CBDCs or other digitally issued fiat currency, or cryptoassets which meet the definition of electronic money or an existing controlled investment. The requirement that qualifying cryptoassets are fungible also excludes NFTs from the definition.
The changes mean that the financial promotions regime will apply not only to promotions for the buying and selling of qualifying cryptoassets, but also to promotions for a range of services including dealing in, arranging deals in, managing investments in, or advising on qualifying cryptoassets. Geographically, promotions capable of having an effect in the UK are caught, including promotions from outside the UK that are targeted at UK investors.
FCA rules applying from 8 October
The FCA has categorised qualifying cryptoassets as high-risk investments, specifically Restricted Mass Market Investments (RMMIs) within the regulatory framework it introduced in August 2022. This applies the same level of regulatory requirements to promotion of qualifying cryptoassets as apply to 'Non-Readily Realisable Securities' (e.g., unlisted company shares or bonds) and P2P agreements. In the FCA's view, RMMIs all share a range of risks that can be exacerbated by poor quality or misleading promotions. The risks include volatility (that can result in sudden, large and unexpected losses), firm failure, comingling of funds, cyber-attacks and financial crime.
The rules for RMMIs allow marketing to mass market consumers, but apply a range of restrictions around the form and content of promotions and the cryptoasset investment consumer journey, including: standardised risk warnings and risk summaries (via digital or non-digital mediums of communication); a ban on incentives to invest (e.g. new joiner bonuses); a mandatory 24-hour cooling-off period for first-time investors receiving a 'direct-offer financial promotion' (DOFP – typically a promotion which specifies the manner of response or includes a form by which any response may be made); other stringent requirements around DOFPs, designed to give consumers pause for thought before making a cryptoasset investment; and requirements on firms to record various metrics throughout the consumer journey.
Existing exemptions available in the FPO will generally apply to promotions of cryptoassets in line with their existing scopes. Firms should note however that some exemptions will not be available for cryptoasset promotions. These are:
- the Article 48 (high net worth individual) exemption;
- the Article 50A (self-certified sophisticated investor) exemption; and
- the Article 51 (Associations of high net worth or sophisticated investors) and Article 61 (Sale of goods and supply of services) exemptions.
A new bespoke exemption for FCA-registered cryptoasset firms
Cryptoasset exchange providers and custodian wallet providers operating in the UK must be registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR-registered businesses), but they are often not otherwise authorised under FSMA, meaning they are not authorised persons.
To address concerns over the implications of requiring cryptoasset promotions to be communicated or approved by authorised persons, the Order inserts a new Article 73ZA into the FPO to enable MLR-registered businesses that are not authorised persons to communicate their own promotions to UK consumers. This exemption is temporary, to be removed when the wider UK cryptoasset regulatory regime enters into force. We considered that regime in our RegTalk blog here.
The exemption will also enable an MLR-registered business that has prepared the content of a promotion to have it communicated by a third party, but firms relying on the exemption will not be able to approve financial promotions for others or communicate their own financial promotions in relation to other controlled investments.
While the new Article 73ZA exemption means MLR-registered businesses will not need external approval of their promotions, they will need to comply with certain FCA rules when communicating their own 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); and
- COBS 10 (Assessing appropriateness).
This means that MLR-registered businesses will essentially be subject to the same standards as authorised persons when communicating cryptoasset promotions.
Implications and action points
Firms planning to market, or to continue marketing cryptoassets to UK consumers after 8 October 2023 should familiarise themselves with the new regime. In particular:
- Firms should take note of and consider responding to the Guidance Consultation (GC23/1) on 'clear, fair and not misleading' cryptoasset communications, published by the FCA on 8 June 2023 (with a response date of 8 August 2023).
- Firms should consider scope of the UK financial promotion regime – this includes websites, apps, social media accounts, marketing campaigns and other public documents.
- Authorised firms and MLR-Registered firms using the Article 73ZA exemption should assess their existing financial promotions strategies and take the necessary steps to ensure compliance with the new rules. The FCA has taken the decision not to apply the forthcoming Consumer Duty to MLR-Registered firms that are using the exemption – such firms will therefore not have to comply with new Principle 12, but will still need to comply with Principle 7.
- UK cryptoasset service providers considering FCA registration to benefit from the Article 73ZA exemption should review the FCA's guidance on good and poor quality applications.
- MLR-registered firms using the exemption should make efforts to understand (taking advice where necessary) the implications of FCA supervisory and enforcement powers that will attach to the communication of their own promotions.
- Authorised firms considering approving cryptoassets promotions need to ensure they can meet the strengthened approver requirements in force from December 2022 and the financial promotions gateway to be introduced when the Financial Services and Markets Bill gains Royal Assent.
- Firms authorised by FCA under EMRs or PSRs cannot communicate or approve financial promotions of cryptoassets as they are not authorised persons.
- Overseas firms will need to consider the potential routes to communicating promotions in the UK.
- Consumers should consider that the new FCA rules on cryptoasset promotions do not alter the fact that there is no recourse for them to compensation under the Financial Service Compensation Scheme (FSCS) or complaints to the Financial Ombudsman Service (FOS) if something goes wrong.