Financial promotions regime: bringing cryptoassets into the fold

On 7 June 2023, the government published the final version of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, which will bring qualifying cryptoassets within the scope of the existing financial promotion regime. The next day, the Financial Conduct Authority (FCA) published a policy statement setting out the conduct rules that the FCA intends to apply to in-scope cryptoasset financial promotions (the CAFP rules).

The new regime will apply from 8 October 2023 to all firms that market cryptoassets to UK consumers, regardless of whether the firm is based overseas or what technology is used to make the promotion.

In the UK, it is a criminal offence to communicate a financial promotion unless it has been made or approved by a firm authorised under the Financial Services and Markets Act 2000 (FSMA) or it qualifies for an exemption. This does not include firms that are otherwise authorised by, or registered with, the FCA, such as registered cryptoasset service providers.

A financial promotion is any invitation or inducement to engage in an investment activity. An investment activity is defined as a controlled activity that is performed in respect of a controlled investment. This means that the regime not only covers promotions for the straightforward sale of a controlled investment, but also promotions in respect of certain activities in respect of controlled investments. Controlled investments include shares, bonds and derivatives. Controlled activities include dealing, providing portfolio management or providing investment advice. The UK regime covers all financial promotions that are capable of having an effect in the UK, including adverts from abroad that are targeted at UK investors.

The exemptions under the regime include:

From 8 October 2023, qualifying cryptoassets will be controlled investments and, therefore, fall within the scope of the existing financial promotions regime. A qualifying cryptoasset is 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) that is both fungible and transferable. This would include many existing cryptoassets, including widely traded cryptocurrencies such as Bitcoin and Ether. There is a carve out for digitally issued fiat currency, including central bank digital currencies, and cryptoassets that meet the definition of electronic money or existing controlled investments.

FSMA-authorised firms, such as banks, investment firms or consumer credit firms, are generally permitted to communicate financial promotions both under the existing regime and the new regime in respect of qualifying cryptoassets. When communicating financial promotions, authorised firms need to comply with the applicable FCA conduct rules. With regard to financial promotions relating to qualifying cryptoassets, authorised firms will need to comply with the proposed CAFP rules.

Under the proposed CAFP rules, the general FCA conduct rules for financial promotions will apply, such as the requirement for financial promotions to be clear, fair and not misleading. In addition, specific requirements will apply to cryptoasset promotions, such as the requirement for a prescribed-form risk warning and a ban on inducements to invest, such as a refer-a-friend bonus.

Additional requirements will apply to direct offer financial promotions (DOFPs), such as the introduction of a 24-hour cooling-off period for first-time investors with a firm, as well as personalised risk warnings, client categorisation requirements and appropriateness assessments. A DOFP is a subcategory of a financial promotion. It is distinguished from a standard financial promotion by having the additional element of specifying a means of response to the promotion, such as an application form. In the policy statement, the FCA said that whether a promotion is a DOFP will depend on the specific circumstances, but anything that promotes an investment and contains a mechanism which enables consumers to place their money in that investment is likely to constitute a DOFP.

The UK financial promotions regime applies to all promotions carried out during the course of business. In practice, this means that one interaction could include several financial promotions, some of which may be standard financial promotions and some of which may be DOFPs. For example, initial contact with a consumer may take the form of an advert promoting a crypto trading app and providing details to allow consumers to download the app. This promotion would likely be a standard financial promotion. However, the next interactions with the consumer inside the app, such as a “buy now” button, will be at risk of constituting a DOFP. It is important to determine at what point in the consumer journey a DOFP is made, as this is the point at which the various protections must be implemented (see box “Example consumer interaction including DOFPs”). As many communications are made through websites that include links enabling direct investments, it is likely that the DOFP rules will apply in the majority of cases.

Registered cryptoasset service providers are cryptoasset exchange providers or custodian wallet providers that are registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (2017 Regulations). Under the existing regime, registered cryptoasset service providers are not allowed to communicate financial promotions unless an exemption applies, and only some of the exemptions will be available in respect of qualifying cryptoassets. For example, the exemption for investment professionals will be available, but not the exemptions for high-net-worth individuals or self-certified sophisticated investors.

To counteract the potentially stifling effect this could have for registered cryptoasset service providers, the new regime introduces a temporary bespoke exemption for registered cryptoasset service providers (the CASP exemption). Under the CASP exemption, registered cryptoasset service providers will be allowed to communicate their own cryptoasset financial promotions, provided that they comply with the CAFP rules.

Under the new regime, unregistered cryptoasset service providers, such as UK providers that are that are not registered under the 2017 Regulations or overseas crypto service providers with no UK presence, will no longer be able to communicate financial promotions to UK clients unless an exemption applies. As with registered cryptoasset service providers, only certain specific exemptions will apply to cryptoassets, the most relevant of which is likely to be the exemption for investment professionals.

Unregistered cryptoasset service providers will no longer be able to communicate financial promotions to retail clients in the UK. In this context, it should be noted that the UK financial promotions regime differs from solicitation-based regimes in other jurisdictions in two ways:

In practice, this means that unregistered cryptoasset service providers will need to assess the content of their website offering, to the extent that it could have an effect in the UK, and consider whether any information displayed there could amount to a financial promotion to retail clients.

Firms have just four months to rearrange their financial promotion strategies to comply with these onerous new regulatory requirements. Firms that are currently unregulated will need to consider if there is a way for their promotions to be approved by an authorised firm or to become authorised themselves or, in the short term, to register under the 2017 Regulations in order to benefit from the CASP exemption.

All cryptoasset service providers should start assessing the content of their websites, apps, social media accounts, marketing campaigns and any other public documents that could have an effect in the UK, and consider whether any information displayed could amount to a financial promotion.

The policy statement is available at www.fca.org.uk/publication/policy/ps23-6.pdf.