On 8 June 2023, the FCA published PS23/6 which sets out near final Handbook rules on the new financial promotions regime for cryptoassets. The new rules apply from 8 October 2023. We set out the key takeaways.

Key impacts

Businesses wishing to continue marketing cryptoassets must act now as they only have 4 months to prepare before the rules start to apply. Essentially unregulated firms will need to either:

  1. Arrange for their promotions to be approved by an authorised firm but approving will become more difficult for firms in the future and also query how many authorised firms are willing to approve marketing for crypto firms; or
  2. Rely on marketing exemptions but these are not helpful for retail client base; or
  3. Become registered under the Money Laundering Regulation 2017 (MLR) but we know that the FCA has high demands for applicants and many have failed to convince the regulator; or
  4. Become an authorised firm – This is coming down the line anyway given the new proposed regimes for stablecoins and unbacked cryptoassets. Authorisation will mean compliance with the financial promotion rules outlined below. The burden of compliance with these, as well as with the requirements for an authorised firm, should not be underestimated.

Key takeaways for the new FCA marketing regime for crypto:

  • Broad scope of assets caught: Businesses must first consider whether their products fall within scope. The definition of qualifying cryptoassets is broad and will capture cryptoassets such as Bitcoin (but note that NFTs are not within scope of the regime). See below.
  • Bringing in line with approach to high-risk investments: As expected, the FCA is taking a consistent approach to cryptoassets to that taken for other high-risk investments. Qualifying cryptoassets will be categorised as Restricted Mass Market Investments (RMMIs).
  • Nuanced application: How the financial promotion regime applies will be dependent on whether the business in question is already authorised, MLR-registered or unauthorised. The table below provides more information on the rules which apply to each.
  • Onerous compliance requirements: Complying with the FCA financial promotion rules will require significant changes to business practices including changes to the audience to which promotions are made, inclusion of risk warnings, addition of positive frictions, requirement to undertake client categorisation and appropriateness assessments, review of any incentives to invest which will be banned under the FCA rules.
  • FCA expects more MLR registered firms: The FCA expects more firms to apply for registration under the MLR as a result of the cryptoassets financial promotion regime. The government has provided a bespoke financial promotion exemption which will enable MLR registered firms to communicate their own cryptoasset financial promotions to UK consumers (see our briefing here). MLR registered firms should note that this is only a temporary solution. The bespoke exemption will be removed when the wider crypto regulatory regime eventually comes into force (see our briefing here). At that point, unless another exemption can be found, only authorised firms will be able to market cryptoassets.
  • ‘Approver’ firms: The Financial Services and Markets Bill, when in force, will introduce a regulatory gateway that authorised firms will need to pass through to approve financial promotions for unauthorised persons (see our briefing here). In the meantime, the FCA expects authorised firms considering approving cryptoassets financial promotions to notify the FCA of their intention to do so in line with Principle 11 and SUP 15.

Cryptoasset Financial Promotion Regime – Overview

What is the scope of the crypto financial promotion regime?

The financial promotion regime will apply to all firms marketing cryptoassets to UK consumers, regardless of whether the firm is based overseas or what technology is used to make the promotion.

Broadly, promotions to buy or sell qualifying cryptoassets or to engage in certain investment services relating to qualifying cryptoassets will, from 8 October 2023, be within scope of the UK financial promotion regime. The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (Crypto Promotion Amendment Order) expands the scope of the financial promotion restriction in s.21 of the Financial Services and Markets Act 2000 (FSMA) by amending the FSMA (Financial Promotion) Order 2005 (FPO) to include financial promotions in respect of certain cryptoassets.

What are ‘qualifying cryptoassets’?

‘Qualifying cryptoassets’ (defined in paragraph 26F of Schedule 1 FPO – see article 9 of the Crypto Promotion Amendment Order) are, broadly speaking:

  • any cryptographically secured digital representation of value or contractual rights that is transferable and fungible
  • includes exchange tokens such as Bitcoin

The following would not be qualifying cryptoassets:

  • Existing controlled investments (eg security tokens, units in collective investment schemes, derivatives)
  • NFTs
  • Electronic money
  • Fiat currency
  • Digitally issued fiat currency
  • Cryptoassets subject to specific limitations (e.g. limited network)

Financial promotion rules for different businesses

  FSMA authorised person

(excludes persons authorised under Electronic Money Regulations 2011 or the Payment Services Regulation 2017)

MLR registered person

(defined in article 73ZA(3) FPO (see article 7 of the Crypto Promotion Amendment Order)

Unauthorised person
Can promotions be made by this group? Yes – as RMMIs

 

 

Yes – as RMMIs

(Note 1: On the basis of the temporary exemption in Art 73ZA of the FPO – see Art 7 of the Crypto Promotion Amendment Order. The exemption also applies to promotions made on behalf of the registered person)

(Note 2: Registered firm will only be permitted to promote qualifying cryptoassets and not other controlled investments)

Yes – but only where one of below applies:

  • promotion is approved by authorised person; or
  • an FPO exemption applies.
Are there restrictions on who promotions can be made to? As RMMIs, mass marketing to retail investors is permitted subject to certain restrictions.

Direct offer financial promotions (DOFPs) (eg a promotion including a form by which response can be made) are restricted to the following groups:

  • Restricted investors (subject to 10% high-risk investment limit)
  • High net worth investors
  • Certified sophisticated investors
As for FSMA authorised persons. Restrictions depend on whether:

  • Promotion is approved by authorised person – same restrictions as applicable to FSMA authorised person
  • There is reliance on FPO exemptions – in line with scope of exemption. Note that Article 48 (Certified high net worth individuals) and Article 50A (Self-certified sophisticated investors) exemptions will not apply to promotions of cryptoassets. The Government has also expressly legislated to disapply the Article 51 (Associations of high net worth or sophisticated investors) and Article 61 (Sale of goods and supply of services) exemptions to cryptoassets.
Do FCA cryptoasset financial promotion rules apply?  Yes

(See PS23/6)

Yes

(See PS23/6 and Art 10 and Schedule 1 of Crypto Promotion Amendment Order)

No
The overarching requirement is that all financial promotions must be fair, clear and not misleading.

Additional restrictions associated with the promotion of RMMIs apply, including the following:

  • Risk warning and associated risk summaries – PS23/6 includes slight modifications to the formats proposed in CP22/2 and PS22/10. Personalised risk warning ‘pop ups’ will apply to DOFPs for first time customers.
  • Ban on incentives to invest – The FCA plans to clarify what is covered by this ban, but has stated that incentives used to motivate consumers to buy are likely to be banned (e.g. offering additional ‘free’ cryptoassets, or offering a feature/benefit for a limited time period only)
  • Cooling-off period – A minimum 24 hour cooling off period will apply for first-time investors with a firm. A customer cannot receive DOFPs (e.g. a promotion including a form via which responses can be made) unless they reconfirm their request after 24 hours.
  • Client classification – Before a DOFP can be made, consumer must complete investor declarations (valid for a 12-month period) relating to their client categorisation as either restricted, high net worth or certified sophisticated investors.
  • Appropriateness –  Before an order can be processed in response to a DOFP, the firm must assess the cryptoasset as appropriate for the consumer. This requires the firm to assess (eg through online interactive questions) that the consumer has the necessary experience and knowledge to understand the risks involved in relation to the specific product or service offered or demanded.

 

Note that some restrictions apply to new customers only and others apply to existing customers.

Where are the relevant rules found?
  • Financial promotion: COBS 4, in particular COBS 4.12A
  • Appropriateness: COBS 10

 

(See Appendix 1 of PS23/6)

  • s.21 FSMA
  • FPO
Sanctions for breach The FCA has stated its intention to take ‘robust’ action against firms breaching its requirements, including, but not limited to:

  • requesting take downs of websites that are in breach
  • placing firms on its warning list
  • placing restrictions on firms to prevent harmful promotions
  • enforcement action
Illegally communicating financial promotions to UK consumers as an unauthorised person is a criminal offence punishable by an unlimited fine and/or two years’ imprisonment

 

Can firm approve financial promotions for other businesses? Yes

The FCA expects firms considering approving cryptoassets financial promotions to notify the FCA of their intention to do so in line with Principle 11 and SUP 15.

The Financial Services and Markets Bill, when in force, will introduce a regulatory gateway that authorised firms will need to pass through to approve financial promotions for unauthorised persons.

No

MLR registered firms cannot approve financial promotions for other businesses. (However, the temporary exemption in art 73ZA of the FPO enables non-real time promotions – broadly, promotions which are made in writing eg emails, websites – to be communicated on behalf of the MLR registered person who prepared the content of the promotion.)

No
Does the Consumer Duty apply? Yes, the FCA will clarify which parts of the Consumer Duty will apply given cryptoassets are only within the financial promotion perimeter. No No

Next steps

The new regime will apply from 8 October 2023. These rules can be considered near final, with no further changes expected to what has been published (subject to exceptional circumstances).

In the meantime, the FCA has published a guidance consultation (GC23/1) for cryptoasset financial promotions, with responses to the consultation requested by 10 August 2023. The FCA expects to publish final guidance in Autumn 2023.

The FCA is also consulting on additional guidance and amendments to the scope of the ban on incentives to invest which will be relevant to promotions for cryptoassets. Responses to this consultation should be submitted by 10 July 2023.

 

Clive Cunningham
Clive Cunningham
Partner
+44 20 7466 2278
Marina Reason
Marina Reason
Partner
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
Partner
+44 20 7466 7477
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789
Alison Cheung
Alison Cheung
Associate
+44 20 7466 2016