On June 8, the UK Financial Conduct Authority (FCA) published a policy statement and near-final rules regarding the promotion of crypto assets.
The rules take much the same shape as those consulted on by the FCA in January 2022, their consultation on the promotion of high-risk investments (including crypto assets), and the associated final rules on the promotion of high-risk investments (excluding crypto assets) contained in their August 2022 policy statement.
One way in which they have been changed in the interim, however, is to reflect the fact that firms that are registered with the FCA for money laundering purposes as crypto asset exchange or wallet providers will be permitted to issue crypto asset financial promotions.
Importantly, this means that the FCA’s crypto asset financial promotion rules will now be extended to firms which are not authorised by the FCA.
the rules will now be extended to firms which are not authorised by the FCA
Given the lack of development of the rules from the consultation, what they say shouldn’t come as a complete surprise, but may well be the source of some disappointment to those working in the industry on the basis of some of the feedback given to the FCA.
The new regime will certainly mark a significant departure from the current position and make it harder for firms to convert promotions of crypto assets into business.
In particular, the rules will provide that:
- A specific risk warning will need to be included in every financial promotion of a crypto asset. This will also need to contain, or link to, a consumer-friendly summary of the key risks of the relevant investment which can be read in around two minutes. There are prescriptive rules for how this warning must be displayed, depending on the type and medium of promotion;
- crypto asset firms will also need to display a further, personalised, risk warning to first-time customers after such a customer has got in touch with the firm;
- incentives to invest in crypto assets will be banned. This will not extend to benefits which are intrinsic to the crypto asset or exclusively bound with its function, but careful analysis will be required to determine whether that is the case;
- each customer will need to be categorised into one of three categories, based on a declaration from the customer which includes an explanation of why the customer meets the criteria to be categorised in the way declared;
- crypto asset firms will have to assess the appropriateness of a crypto asset for any customer, which in many cases will involve the customer being required to answer a questionnaire devised by the firm to determine the customer's understanding of the area, before they can first provide access to crypto assets. There are various criteria which any such questionnaire would need to fulfil; and
- there will have to be a 24-hour ‘cooling-off’ period between the customer making first contact with the firm and being able to invest. This period can, however, run alongside other elements of the onboarding process (e.g. know your customer checks).
Undeniably, these new rules will increase the compliance and cost burden on firms which, to date, have not been subject to any rules when promoting crypto assets.
There is also a good argument that, as firms responding to the FCA’s consultation have mentioned, this is likely to make the whole process stickier and individuals less likely to invest in crypto assets. However, this is perhaps unsurprising and one might consider that this is what the FCA was after all along.
After all, in an environment in which a parliamentary body has called for the crypto asset industry to be regulated as gambling, rather than financial services, the FCA might be expected to impose significant consumer protection (and submitting to this may be better for crypto asset firms than the alternative).
a number of firms have argued [there is] insufficient lead time to prepare for the requirements
In addition, there might be some relief that the Consumer Duty is not to be applied to crypto asset firms which are merely registered with the FCA for money laundering purposes, rather than being fully authorised.
There is a valid question as to whether this new regime might just drive customers to firms based offshore and that is one potential consequence in the short term. However, the scope of the proposed broader crypto asset regulatory regime is likely to close any such loophole in time.
Absent any unforeseen events, the rules described above will come into force on October 8, 2023. This allows only four months for implementation, which a number of firms have argued is an insufficient lead time to prepare for the requirements, especially as existing, and not just new, customers will need to be categorised and assessed for appropriateness.
This is a government-initiated deadline, so there was not much the FCA could do about it, but spare a thought for those crypto asset firms that are not registered with the FCA but still want to make financial promotions: they are unlikely to have any chance of being ready in time.
Tim Fosh is senior counsel at law firm Slaughter and May.
