This article was last updated on 12 October 2023.
From 8 October 2023, marketing from cryptoasset firms to UK consumers will need to comply with the new UK financial promotions regime.
What is the new UK financial promotions regime?
The Government has legislated to bring the promotions of certain cryptoassets within the remit of the UK Financial Conduct Authority (the FCA).
The rules will apply to all financial promotions that can have an effect in the UK. Overseas firms do not necessarily need to actively target UK-based consumers to be within scope if the media channels they utilise are accessible from the UK.
What cryptoassets are captured?
The definition of a financial promotion is intentionally broad and has been expanded to capture any invitation or inducement to deal (e.g. invest) in qualifying cryptoassets.
A cryptoasset is defined as "any cryptographically secured digital representation of value orcontractual rights that: (a) can be transferred, stored or traded electronically; and (b) uses technology supporting the recording or storage of data". A cryptoasset will fall within the scope of the new regime if it is, broadly, (i) fungible, and (ii) transferable.
What types of promotions are captured by the new regime?
The financial promotions regime is designed to be technology neutral and applies to a wide range of communications including website, mobile apps, social media, blog posts and online advertising. It is anticipated that almost all (if not all) websites and apps that enable a UK consumer to invest in cryptoassets will be in scope.
The scope of the regime
When the regime comes into force, there will be four routes to communicating cryptoasset promotions to UK consumers:
The promotion is communicated by an FCA authorised person.
The promotion is made by an unauthorised person but approved by an FCA authorised person. Authorised firms will need to pass through a new regulatory gateway in order to approve financial promotions for unauthorised persons.
The promotion is communicated by a cryptoasset business registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) with the FCA.
The promotion otherwise complies with the conditions of an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.
Promotions that are not made using one of these routes will be in breach of section 21 of the Financial Services and Markets Act 2000, which is a criminal offence punishable by up to 2 years imprisonment, an unlimited fine or both.
Promotions communicated through routes 1, 2 or 3 will need to comply with FCA rules. In this respect, the FCA has taken a consistent approach to cryptoassets to that taken for other high-risk investments and has chosen to categorise cryptoassets as "restricted mass market investments" for these purposes.
The new rules will, among other things:
- oblige firms to provide customers with specific risk warnings and risk summaries;
- ban the use of incentives to invest;
- impose a 24-hour cooling off period; and
- require client categorisation and appropriateness assessments.
The above are in addition to the overarching requirement that promotions are fair, clear and not misleading.
Enforcement
The FCA has communicated that that the new rules are "tough". Lucy Castledine, Director of Consumer Investments, commented, "Come 8 October, we will be taking action against firms illegally marketing to UK consumers." The new rules are set against a backdrop of increasing FCA action against misleading financial promotions – in 2022, the FCA required firms to amend or remove 8,582 promotions, 14 times more than 2021.
The FCA's enforcement measures may include placing firms on a Warning List, requesting the removal of websites that are in breach, and taking enforcement action.
The FCA has also warned that it may take additional measures if necessary to ensure that firms comply with the new rules. These measures may include imposing fines, revoking licenses, and pursuing criminal charges against individuals or firms that are found to be in breach of the regulations.
The FCA has emphasised that it takes the promotion of cryptoassets very seriously and will not hesitate to take action against firms that do not comply with the new rules.
Timing
Core rules will come into effect, as planned, on 8 October 2023. These include that marketing must be "clear, fair and not misleading", include prominent risk warnings that consumers can understand, and do not inappropriately incentivise people to invest.
However, in response to industry concern regarding technical readiness, firms can apply to delay implementation of the 24-hour cooling off period, client appropriateness testing and client categorisation features until 8 January 2024.
Post Implementation Update
Following publication of this article, the legislation has come into force, and the FCA issued 146 alerts in just the first 24 hours. The FCA have issued a statement advising businesses to consider the alerts issued, and to play their part in protecting UK consumers from illegal promotions.
If your business has any queries relating to how the regime affects them, please get in touch.