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The Financial Conduct Authority (FCA) has published its policy statement (PS23/6) on financial promotion rules for cryptoassets, which includes near-final FCA handbook rules covering this.
These rules are unlikely to change radically before they come into force on 8 October 2023. They follow an initial consultation (CP22/2) and a Policy Statement (PS 22/10). The FCA states that it will vigorously enforce these rules and will usually use key enforcement cases to move the industry into the right position.
At the same time, the FCA is also consulting on some additional guidance in relation to financial promotions, as well as different types of investment and lending products, in order to better understand the market and the risk they may pose to investors. Respondents have until August 10 to submit their views.
Here are some of the key elements of the financial promotion regime, as described by the FCA:
Risk warnings
“PS22/10 represents our response to feedback on CP22/2 proposals for personalized risk alerts. This includes feedback from respondents representing the crypto-asset sector.
“We intend to continue applying a personalized risk warning to direct financial promotions (DOFPs) of cryptoassets. We also intend to apply the amendments to PS22/10. We continue to believe that this intervention is important to help consumers understand the risks of investing. Given the evidence from behavioral testing that has confirmed this as a key element in helping consumers understand the risks of investing, we continue to believe that this intervention is needed to protect consumers.”
Prohibition of incentives
“We continue to believe that investment incentives may unduly influence consumers’ investment decisions and induce them to invest without fully considering the risks involved. Given the evidence from our consumer research that shows how social and emotional factors can have a strong influence on investment decisions, we will continue to apply this ban to financial promotions of crypto-assets.
“We want to clarify that we would not consider benefits that are inherent to a cryptoasset or that are solely related to its function and/or business model as ‘incentives.’ This may include features or benefits that are part of the terms and conditions associated with a particular crypto-asset. For example, crypto-assets that serve to give the owner voting rights and that are used for the purpose of establishing governance arrangements for a particular platform or project would not be considered inducements.
“However, a benefit that is not inherent to the crypto-asset, nor is it solely related to its function or business model, and is used to motivate a consumer to purchase that crypto-asset, is likely to be considered an inducement. For example, offering an additional ‘free’ cryptoasset is likely to be considered an incentive. Furthermore, a feature or benefit is likely to be considered an incentive if it is only available for a limited period of time.”
24 hour cooling off period
“We intend to continue applying a cooling-off period to DOFP’s crypto-assets. We still believe this measure is important to help consumers have enough time to consider whether an investment is right for them. We expect that most firms will implement this proposal as part of their broader consumer engagement process. This includes conducting AML/KYC checks on customers. The guidance provided in PS22/10 and reiterated above should provide sufficient clarity to firms on how to apply this rule and the DOFP rules more broadly.
“We want to clarify that the cooling off period does not apply to every single cryptocurrency transaction. We recognize that applying this rule on a transaction-by-transaction basis could itself lead to harm to consumers. This rule applies only to investors who enter a certain company for the first time, i.e. when the consumer has not previously received a DOFP from the company. It also does not otherwise limit the information that firms can provide to consumers during the cooling-off period, such as price information.”
Categorization of clients
“We intend to proceed with the consultation on the application of the Limited, High Net Worth and Certified Sophisticated Investor categories to DOFP’s cryptoassets. We also intend to apply the PS22/10 amendments to investor statements. We do not propose that the Self-Certified Sophisticated Investor category apply to DOFP’s cryptoassets.
“We remind companies that investor statements are only valid for 12 months. This should take into account changes in life circumstances such as loss of employment, which may affect the way an individual consumer can be categorized. Firms will need to recategorize consumers after the 12-month period if they wish to make further direct DOFPs.”
Suitability test
“We intend to continue applying suitability assessment requirements to DOFP’s cryptoassets. We also intend to apply the amendments to PS22/10. We continue to believe that this measure is vital to ensure that consumers only invest where they understand the risks involved. Other high-risk investments are subject to these requirements and we see no compelling reason to treat cryptoassets differently.”
Duty of the consumer
“In December 2022, we published a three-month consultation document (CP22/26) with a proposal for amendments to the application of the Duty. We subsequently published the final rules in Handbook Notice 108. In this consultation, we consulted to clarify that the duty applies to authorized firms that approve or communicate financial promotions, as well as firms that carry out regulated activities or ancillary activities, payment services or issue e. – money.
“However, as our current regulatory scope for cryptoassets only covers promotions and requirements under MLRs, only the aspects of the duty relating to financial promotions will apply to firms in this sector. These aspects apply to authorized firms communicating or approving financial promotions for cryptoassets, where they are directed at retail clients.
“Furthermore, the obligation only applies to firms to the extent that they can determine or materially influence the results of retail customers. Consumer duty is also supported by the concept of reasonableness. Therefore, what is expected under the Duty will be interpreted in the light of what is reasonable in the circumstances. In practice, this means that companies that are distant from retail customers, with no direct relationship with customers, may have more limited obligations towards Customs.
“In connection with their approval or announcement of financial promotion, we would especially expect authorized firms to pay due attention to their responsibilities under the general duties of the Duty for Firms and the result of consumer understanding. Cross-sectoral rules include obligations to act in good faith, avoid foreseeable harm and enable and support retail consumers to achieve their financial goals.
Acting in good faith requires authorized firms to take into account the interests of customers when presenting information. In particular, an authorized firm that communicates or approves a financial promotion should act in good faith and not exploit or manipulate the retail consumer’s behavioral biases to mislead or create demand for the product. They should not exploit the vulnerability of retail customers and cause harm.”
Conclusion
From my perspective – as a former regulator with 25 years of policy-making experience – I believe the FCA’s obligations are tough and provide a comprehensive approach to investor protection. It will change the way firms do business, create more regulatory friction and be more expensive for firms.
The initial position of the FCA is that it considers crypto-assets as a high-risk investment for consumers. However, this result will provide higher standards of investor protection.
Consumer duty is one area to watch to see how the FCA will use it to enforce investor protection obligations – particularly as broader crypto behavior and prudential regulation emerges in due course.
We at Elliptic’s GPRG team are always happy to communicate with clients about our understanding of these and other crypto-related regulations. Email mark.aruliah@elliptic.co.
EMEA Crypto Businesses Regulation
