In the face of continued volatility across the cryptoasset sector, coupled with a growing mismatch between consumers' investment decisions and their stated risk tolerance, the FCA has now published its final policy position on the promotion of cryptoassets (accompanied by 'near final' Handbook rules and supplementary guidance). Where firms market cryptoassets to UK consumers, the rules are likely to require considerable changes to in-scope firms' processes and controls around promoting cryptoassets and onboarding retail clients.
In January 2022, HM Treasury (HMT) confirmed its intention to legislate to bring certain cryptoassets within scope of the Financial Promotions Order. Shortly afterwards, the FCA published CP22/2 laying out strengthened rules for financial promotions of high-risk investments including cryptoassets. While these rules were finalised for other high-risk investments in PS 22/10, the FCA noted that final rules for cryptoassets would be confirmed once the legislative process was complete. Despite the delayed timeline, the FCA confirmed that cryptoassets would follow a consistent approach to PS22/10 (i.e. they would be treated the same as other high-risk investments), in order to maintain technology-neutrality.
Now that the relevant legislation has been made1, the FCA has published its final policy position in PS23/6 including 'near final' rules. The rules were published as 'near final' in order to give firms as much time as possible to prepare for the regime, while outstanding approvals are sought. The FCA has made it clear that, subject to exceptional circumstances, no further changes are expected, and these rules will apply from 8 October 2023. This compresses the original CP22/2 six-month transition period down to four-months.
Changes to the original consultation
Details of the original CP22/2 proposals are described in our previous article here. In short, these proposals included defining cryptoassets as Restricted Mass Market Investments (RMMI) — which would require their promotion to be subject to additional restrictions (including risk warnings, banning incentives to invest, a cooling-off period, client categorisation requirements and appropriateness assessments). These stipulations would apply to all firms marketing cryptoassets to UK consumers regardless of whether the firm was based overseas or what technology was being used.
In PS23/6, the FCA stated it intends to proceed with the RMMI categorisation and its associated restrictions. As such, it is proceeding largely as consulted with only a few targeted changes (most of which seek to align to the rules in PS22/10 for other high-risk investments). These changes include:
- Shortening the main risk warning to '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. Take 2 mins to learn more', but allowing firms to vary the prescribed risk summary (where they have good reason)
- Clarifying that the 24-hour cooling off period starts from when the consumer requests to view the direct offer financial promotion (DOFP)
- Firms can proceed with other parts of the consumer journey (e.g., KYC/AML checks, appropriateness assessments) while the cooling-off period applies. If these other processes take more than 24 hours, firms will not need to introduce an additional pause in the consumer journey, although active consumer consent would still be needed to proceed
- Clarifying that, during high-net-worth attestations, consumers can provide figures to the nearest £10,000 / £100,000 and clarifying the level of checks firms are expected to conduct on the investor declaration form
- The FCA confirmed it will not apply the self-certified investor category
- Modifying rules so that consumers must wait at least 24 hours before undertaking the appropriateness test again (from their second assessment onward)
- The FCA will update the guidance firms should follow as part of this assessment
- Only introducing requirements to record the metrics proposed in CP22/2 that relate to client categorisation and appropriateness assessments
- Aligning the reduced implementation period to four months
- The FCA will clarify how the regime applies to communications with existing customers and noted that it generally expects the new regime to impact communications which seek to encourage new investors
- Clarifying the application of the Consumer Duty
- The Duty applies to authorised firms communicating or approving cryptoasset promotions, but it does not yet apply to promotions made by Money Laundering Regulations (MLR)-registered cryptoasset businesses
- For authorised firms, the FCA will clarify which parts of the Duty apply (given cryptoassets are only within the financial promotion perimeter)
It is worth noting that in the FCA's June Quarterly Consultation Paper, clarifications around CP22/2's original banning of incentives to invest are proposed, which would also impact cryptoasset promotions.
To supplement PS23/6, the FCA has also published a Guidance Consultation (GC23/1) which aims to support firms in implementing the central requirement for promotions to be 'fair, clear and not misleading'.
Although the GC addresses all cryptoasset promotions, it includes a particular emphasis on assets and arrangements that can cause 'significant consumer harm' — e.g., 'cryptoassets that claim to be stable', 'cryptoassets that claim to be backed by a commodity or asset' or 'complex yield models such as cryptoasset borrowing, lending and staking'. The GC includes an additional chapter dedicated to further discussion questions around complex yield models in order to better understand these arrangements. It also includes specific guidance on social media promotions, due-diligence expectations, disclosing legal and beneficial ownership and disclosing a firm's regulated status.
Respondent feedback is due by 10 August 2023, with the final guidance document to be published in the autumn.
Re-cap: four routes to promotion
The requirements of the Financial Promotions Order mean that any entity intending to promote cryptoassets needs to have its promotions approved by an FCA-authorised firm. Due to concern that this could significantly restrict cryptoasset promotions, HMT introduced a temporary exemption allowing cryptoasset firms that are registered under the MLRs to communicate their own cryptoasset promotions. (Once the UK's wider crypto regulatory framework is finalised, cryptoasset firms will need to obtain full authorisation and thus will be able to issue their own promotions without the need for an exemption, at which point this exemption will be removed.)
As such, there are currently four routes to legally promoting cryptoassets to UK consumers:
- The promotion is communicated by an authorised person
- The promotion is made by an unauthorised person but approved by an authorised person. (Legislation is currently making its way through the UK Parliament which, if made, would introduce a regulatory gateway that authorised firms will need to pass through to approve financial promotions for unauthorised persons)
- The promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the MLRs
- The promotion is otherwise communicated in compliance with the conditions of an exemption in the Financial Promotions Order
The requirements of PS23/6 will apply regardless of which route is used.
Following the publication of PS23/6, all firms marketing cryptoassets to UK consumers must finalise their preparations for the new regime, ahead of 8 October. Specifically, these firms must consider which route they will use to lawfully communicate their cryptoasset promotions and how they will meet the relevant requirements of that route. The requirements are complex, and the implementation timeframe is short — as such, firms should not underestimate the effort needed. Any firm or individuals in breach could be subject to enforcement action (including the potential for an unlimited fine and / or two years in jail).
The FCA has re-emphasised that, even when the financial promotions regime comes into force, cryptoassets will remain high risk and largely unregulated — especially until the UK's wider regulatory framework is finalised (see more in our article here).
How KPMG in the UK can help
KPMG in the UK has supported many clients with a wide range of matters concerning financial promotions and can help you with:
- Designing and building a financial promotions framework
- Designing and building a customer journey with relevant frictions
- Training relevant staff on rules, processes and policies
- Using technology accelerators to strengthen frameworks
- Integrating a financial promotions framework with Consumer Duty frameworks (where applicable) for supporting the delivery of good customer outcomes.
If you have any questions or would like to discuss any matters concerning cryptoassets and financial promotions, please get in touch.
1 The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023