FCA warns firms as new cryptoassets financial promotion regime comes into force

It is a criminal offence in the UK to communicate an invitation or inducement to engage in an investment activity – unless the communication was made or approved by a person authorised under Part 4A of the 2000 Financial Services and Markets Act (FSMA). But earlier this month, an amendment to FSMA effectively extended the existing financial promotions regime to qualifying cryptoassets.

The change means anyone who is not an authorised person under Part 4A of the FSMA, or an MLR-registered firm under the 2017 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLR), will be restricted from promoting qualifying cryptoassets. This is the case unless the promotion is approved by an authorised person, or an exemption applies to the financial promotion.

Financial services regulation expert Andrew Barber of Pinsent Masons said: “Firms should take note of the additional restrictions on the content and form of financial promotions of qualifying cryptoassets and ensure that appropriate risk-warnings are now included in any financial promotion.”

“Authorised firms should have already applied for modification by consent – if they were unable to comply with the rules by 8 October – and ensure they have sufficient evidence that their cryptoassets processes and promotions will be compliant with the new rules,” he added. His warning came after the FCA published updated guidance to assist firms with complying with the cryptoassets financial promotion regime.

‘Qualifying cryptoassets’ are defined by the amended legislation as any cryptographically secured digital representation of value or contractual rights that can be transferred, stored, or traded electronically, and uses technology supporting the recording or storage of data – which may include distributed ledger technology. While the definition captures many types of existing cryptoassets, such as Bitcoin, digitally issued fiat currency and cryptoassets that meet the definition of ‘controlled investments’, ‘electronic money’, or ‘fiat currency’, are not qualifying cryptoassets.

In addition to the existing requirements that apply generally to all financial promotions, additional restrictions apply to the promotion of qualifying cryptoassets, including the requirement for promotion of cryptoassets be accompanied by appropriate risk warnings – and a ban on certain types of incentive offers, such as refer-a-friend and new joiner bonuses.

Direct offer financial promotions of qualifying cryptoassets are also subject to further rules, including the introduction of a 24-hour cooling-off period for first-time investors with the firm, personalised risk warnings, client categorisation, and appropriateness assessment requirements.

The FCA said it expects firms to consider how risk summaries and appropriateness assessments should be tailored to the specific cryptoassets being promoted. In particular, the FCA said firms should review its rules and guidance on the prominence of risk warnings.

Jonathan Cavill, financial services and regulatory risk expert at Pinsent Masons, said the FCA continues to see cryptoassets as high risk and will take enforcement and supervisory actions to address non-compliant financial promotions. “The FCA has suggested it may take a range of actions against non-compliant firms, including placing firms on the warning list, removing or blocking financial promotions such as websites, social media accounts, and apps, placing restrictions on firms to prevent harmful promotions, and taking enforcement action against the firm,” he added.

“Firms in global group structures may need to significantly restructure how they provide services to UK customers to ensure they comply with the new rules. They must also implement effective systems and controls in their wider group to prevent UK consumers being promoted to by unauthorised or unregistered firms, or risk committing a criminal offence,” Cavill said.

The FCA said firms will be also expected to have clear plans setting out their key milestones for delivering their implementation plans and have clear reporting in place to show their progress against those plans. They should be able to identify if they are on course to deliver any critical milestones that must be met to avoid failing to comply.

Planning and implementation should be overseen by a senior individual in a ‘business’ role, such as the CEO or COO, and firms should plan for ongoing monitoring and reviewing the effectiveness of processes and controls and consider how these support good customer outcomes, according to the FCA.

Firms that promote qualifying cryptoassets to UK customers after 8 October without complying with the new rules are at risk of committing a criminal offence punishable by an unlimited fine and/or up to two years imprisonment. Cryptoassets firms that are currently registered or authorised by the FCA, and firms registered under the MLRs can apply for flexibility under a modification by consent. If the application is successful, the firm will have until 8 January 2024 to implement the additional requirements.