On 8 October 2023, 'tough new rules designed to make the marketing of cryptoasset products clearer and more accurate'1 come into force in the UK. These new rules significantly restrict the way cryptoassets can be marketed and advertised to UK consumers by both UK-based and offshore firms.
Who do the new rules apply to?
The new rules are wide in scope as they apply to communications capable of having an effect in the UK. They may bind many types of firms dealing in or marketing cryptoassets to consumers. The rules expressly apply to:
UK firms, including:
- Any firm where that firm currently promotes, or plans to promote, cryptoassets to UK consumers;
- Cryptoasset firms registered with the Financial Conduct Authority ("FCA"), i.e. those already registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("the MLRs"); and
- FCA-authorised firms, where the firm intends to approve cryptoasset financial promotions on behalf of another firm (also known as s21 approvers).
Non-UK firms, including:
- Any firm marketing cryptoassets to UK consumers, regardless of where the firm is based, and whether or not the promotion is specifically directed at UK consumers.
'If a UK consumer can access and respond to [a firm's] cryptoasset promotions to engage in the cryptoasset activities, such as through websites, apps and/or social media, it is likely that those promotions will be capable of having an effect in the UK.' 2
What are the new rules?
Following Government consultation and the introduction of secondary legislation, the promotion of "qualifying" cryptoassets will now be subject to the general restrictions on financial promotions under section 21 of the Financial Services and Markets Act 2000 ("FSMA").
These new rules significantly restrict the way cryptoassets can be marketed and advertised to UK consumers by both UK-based and offshore firms.
The new rules expand the financial promotions regime to include certain types of cryptoasset for the first time. So-called "qualifying cryptoassets" are any cryptographically secured digital representation of value or contractual rights that are transferable and fungible. This does not include cryptoassets which meet the definition of electronic money or an existing controlled investment, but most cryptocurrencies and exchange tokens will therefore fall in scope
The new rules restrict who may promote cryptoassets to UK consumers. There will only be four permitted routes through which a firm may do so:
- promotions communicated by an "authorised person" under FSMA;
- promotions made by an unauthorised person but approved by an authorised person;
- promotions which comply with existing exemptions under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("the FPO") – these principally include promotions to institutional investors; or
- promotions communicated by, or on behalf of, a cryptoasset business registered with the FCA under the MLRs in reliance of the exemption under Art. 73ZA of the FPO. This exemption to section 21 FSMA was introduced by the Government to enable cryptoasset exchange or custodian wallet providers that are not authorised persons, but are registered with the FCA under the MLRs, to communicate their own promotions of qualifying cryptoassets instead of requiring approval from authorised persons.
Alongside these developments, on 8 June 2023, the FCA published Policy Statement PS23/6: Financial promotion rules for cryptoassets ("the PS23/6"), which sets out the FCA's expectations and enforcement approach towards the new rules. The publication brings cryptoasset promotions to UK consumers within the FCA's remit and introduces a series of new rules for marketing cryptoassets. The most significant rules in the PS23/6 include:
- A ban on incentives to invest – this includes "refer a friend" and new joiner bonuses
- A cooling-off period – a mandatory 24-hour cooling-off period for first-time investors starting from the first viewing of a Direct Offer Financial Promotion ("DOFP")
- Risk warnings – a personalised risk warning pop-up for first-time investors with a firm which must address the investor by name, and a standard generalised risk warning to be included on all cryptoasset promotions, the wording of which is mandatory and set by the FCA
- Client categorisation requirements – before a DOFP can be made, each investor must be categorised as a Restricted, High Net Worth, or Certified Sophisticated investor. Investors will also have to sign a declaration that they meet the relevant criteria, and these declarations will only be valid for a 12-month period, after which firms will need to categorise investors again if they wish to make further direct DOFPs.
- Appropriateness assessments – firms must assess the appropriateness of a qualifying cryptoasset investment on a consumer-by-consumer basis, ensuring that a retail consumer has the necessary experience and knowledge to understand the risks involved in relation to a qualifying cryptoasset. The FCA has applied detailed and clear obligations of the information which must be sought from consumers before such an assessment can be made.
The above rules are in addition to the overarching requirements under COBS 4.2 that financial promotions must be clear, fair and not misleading.
What if my firm does not comply with the new rules?
Firms found in breach of the new rules will be committing a criminal offence punishable by an unlimited fine and/or 2 years in prison.
Firms found in breach of the new rules will be committing a criminal offence punishable by an unlimited fine and/or 2 years in prison.
The FCA has confirmed it intends to take robust action against firms breaching these requirements. Alongside criminal liability, this could include take downs of websites, placing firms on the FCA's warning list, placing restrictions on firms to prevent harmful promotions and enforcement action.
Those who are already registered with the FCA, may be subject to enforcement notices, penalties and in the worst-case removal of their permissions.
Next steps to take
All firms marketing cryptoassets to UK consumers, including those based outside the UK, must prepare for the new regime. The FCA has encouraged firams to take expert advice as part of their preparations – here are the main things you need to think about:
Check your firm is aware of the rules
For firms experienced in FCA-regulated investments, these new rules will be familiar, but there are some key differences and exemptions which will not apply to cryptoasset promotions.
Check that you have a plan in place to comply with the new requirements
Firms that intend to continue marketing to UK consumers need to consider which of the four permitted routes they will use to lawfully communicate their promotions and how they will meet the relevant requirements of that route.
Few of the rules are subject to transition arrangements; most will apply immediately from 8 October 2023. It is important that you seek advice immediately.
For some firms, there may be no permitted route available under the current structure of their promotions, and they may have to register with the FCA to continue marketing to UK consumers. The FCA can take up to three months to assess registration applications. Often the FCA will have questions or seek clarifications after receiving an application, so it is unlikely that firms will get registered straight away.
Firms registered or authorised by the FCA may apply for flexibility, and if successful, they will have until 8 January 2024 to implement the 24-hour cooling period, the appropriateness assessments and the client categorisation features.
Stress-test new policies and approach
Firms which have implemented changes to comply with the new rules must be able to demonstrate that new procedures are effective and compliant. Firms should consider monitoring the implementation of new arrangements, and having new policies reviewed externally, not only to identify deficiencies but also to evidence a clear commitment toward compliance should there be later regulatory scrutiny.
Consider arranging an independent review of your modified customer journey to identify any deficiencies before the regulator does.
Few of the rules are subject to transition arrangements; most will apply immediately from 8 October 2023. It is important that you seek advice immediately if your business will be affected to ensure that you are compliant.
Footnotes
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
