The UK Financial Conduct Authority ("FCA") has published its near-final rules in relation to the regulation of financial promotions in respect of cryptoassets. They are a game-changer in relation to the "regulation" of cryptoassets in the UK, even though such assets are not yet within the FCA's regulated activities perimeter.

On 8 June 2023, the FCA published its near-final rules in relation to the regulation of financial promotions in respect of cryptoassets. They have awaited legislation which empowers them to make such rules and the new rules are expected to come into force in early October of this year. The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the "2023 FPAO") provides that dealing in qualifying cryptoassets as principal or agent will become a "controlled activity" to which the FCA's financial promotions regime will apply. At the same time, the 2023 FPAO created a new exemption (Article 73ZA) in the Financial Promotions Order ("FPO") allowing cryptoasset exchanges and custodian wallet providers (together, "cryptoasset businesses") registered under the Money Laundering Regulations (the "MLRs") to communicate financial promotions in relation to cryptoassets without the need to have those promotions approved by an authorised firm, subject to complying with the conditions of the exemption. Cryptoasset businesses seeking to carry on business in the UK have been required to register with FCA under the MLRs and such businesses that are not registered under the MLRs will not be able to rely on this exemption to communicate cryptoasset financial promotions.

We highlight below a number of the key provisions:

• The new rules only apply to "qualifying cryptoassets", and a number of types of crypto-like assets are excluded.
• The rules apply to both authorised firms and cryptoasset businesses which have been registered for the purposes of the MLRs but which are not authorised firms.
• The following broad FCA Handbook provisions will apply to registered cryptoasset businesses when communicating financial promotions in reliance on the new FPO exemption:
  - Principle 7 (Communications with clients)
  - Relevant parts of GEN (Statements about authorisation and regulation by the appropriate regulator)
  - COBS 4 (Communicating with clients, including financial promotions)
  - COBS 10 (Assessing appropriateness). 
• As highlighted above, the FCA's Principle for Business 7 will be applied to registered cryptoasset businesses as it applies to authorised firms communicating financial promotions relating to qualifying cryptoassets. It requires that in communications with clients, a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
• The FCA will categorise cryptoassets as "Restricted Mass Market Investments" ("RMMI") which means that although mass marketing is allowed to retail investors, it is subject to certain restrictions. The FCA indicate they wish to clarify that their rules do not limit promotions of cryptoassets to only high net worth or sophisticated investors, and firms can communicate financial promotions to all consumers subject to complying with the relevant requirements. However, firms can only make Direct Offer Financial Promotions  ("DOFPs") to consumers who have been categorised as (i) "high net worth" investors, (ii) "certified sophisticated" investors or (iii) "restricted" investors (note not "self-certified sophisticated" investors) under the FCA's customer classification rules. DOFPs are financial promotions which contain or specify a manner of response by which a recipient of the promotion may make or accept an offer to enter into a "controlled agreement”, such as one which invites the consumer to complete an online application form and giving their bank account details or make payment by payment card. The FCA say they expect most consumers investing in cryptoassets to be categorised as a restricted investor. The requirements in relation to each of these 3 categories are set out in the Annexes to COBS 4. The "restricted investor" category requires them to certify that in the past 12 months they have either invested less than 10% of their net assets in high-risk investments or if not, to disclose such higher percentage, and likewise to disclose their intentions over the next 12 months. They must also provide a disclaimer acknowledging they appreciate that they will be exposed to promotions for investments where there is a risk of losing all of their money.
• The new rules will ban incentives to invest such as "refer a friend" or new joiner bonuses.
• The new rules will include a mandatory 24 hour "cooling off" period for new investors.
• A personalised risk warning will need to be included in any such financial promotion:

  
  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
  
  Where the number of characters contained in the risk warning above exceeds the number of characters permitted by a third-party marketing provider, a shorter risk warning is specified:

  Don’t invest unless you’re prepared to lose all the money you invest.

• Where the financial promotion is to be communicated by way of a website, mobile application or other digital medium, the risk warning must also include a link in the form of the text "Take 2 mins to learn more" which will take the potential investor to a detailed, cryptoasset-specific risk warning explaining that the FCA considers that the investment is "high risk" and outlining certain key risks including that they could lose all of the money they invest and they should not expect to be protected if anything goes wrong in particular because the FSCS does not protect this type of investment and the FOS will not be able to consider complaints.
• The FCA's appropriateness obligations in COBS 10 will apply to both authorised firms and registered cryptoasset businesses when transacting in qualifying cryptoassets with retail customers in response to a DOFP, and a number of obligations specific to assessing appropriateness in relation to qualifying cryptoassets are to be included in the relevant COBS 10 rule Annex.
• While the Consumer Duty will also apply to authorised firms from the end of July, the FCA say that they do not intend to apply it to unauthorised MLR-registered firms communicating their own promotions at this point.

In terms of enforcement in relation to the unauthorised but registered cryptoasset businesses, the FCA highlight their powers to impose requirements under S55L of the Financial Services and Markets Act 2000 and ban adverts under s.137S of that Act, and also to take enforcement action or bring criminal or civil proceedings through the courts. They say they can use powers to impose a disciplinary sanction, including public censures and financial penalties, as well as powers to obtain redress and restitution.

Commentary

We doubt that much of what is proposed will be surprising given that a similar but not identical set of rules were introduced in February 2023 for other investments which FCA has categorised as RMMI as distinct from "Readily Realisable Securities" ("RRI") which are not subject to such marketing restrictions, and "Non-Mass Market Investments" which cannot be marketed to retail investors.

UK "regulation" of cryptoasset businesses was arguably already well underway following the imposition of the requirement that unauthorised cryptoasset businesses operating in the UK must be registered with the FCA for the purposes of the MLRs, and subjecting them to the requirements imposed on such businesses in order to qualify for registration.

However, the imposition of these new business conduct rules on both authorised firms trading in relevant cryptoassets and unauthorised but registered cryptoasset businesses that do so, is a real step-change. In particular, the new regime involves classification of cryptoassets as RMMI as opposed to RRI, with the additional restrictions that go with that, the prescribed risk warnings, a mandatory cooling off period, the application of Principle 7 and the potential for enforcement action, all of which apply to both authorised but also unauthorised (albeit registered for MLR purposes) firms.

Author: David Capps