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Mark Aruliah – Elliptic’s Senior Policy Adviser, EMEA – talks to Gunner Cooke’s James Burnie about the Financial Conduct Authority’s (FCA) recent policy statement PS22/10, which sets out new rules on the financial promotion of high-risk investments. He agrees that the “game changer” is the requirement that the financial promotion of digital assets be approved by a person authorized by the FCA, which for now can no to be a cryptocurrency firm.
For FCA regulation to bite, HM Treasury must come forward with legislative changes to the Financial Services and Markets Act (FSMA). Industry trade bodies such as CryptoUK and the GDF have been vocal that the approach proposed by HM Treasury (HMT) will create significant costs and inefficiencies for the UK sector. HMT’s final approach to this issue for UK-registered firms will in some way affect the competitive nature of the UK crypto-asset industry going forward.
But what does James Burnie think? Mark sat down with him to find out.
What are the likely changes in the financial promotion of cryptoassets in the UK?
One of the most anticipated changes to the UK regulatory regime is the new requirements that will apply when advertising cryptoassets in the UK. These rules are likely to apply to the financial promotion of fungible digital assets – ie. non-fungible tokens (NFTs) – in the United Kingdom, regardless of where the entity selling the tokens is based. Financial promotion in this context is an invitation or incentive to invest in a crypto-asset.
The FCA recently published a Policy Statement (PS22/10), setting out its proposed approach to regulating financial promotions of various investments. Although the FCA does not yet have dominance over the financial promotion of digital assets in the UK – so they are generally excluded from the Policy Statement – the FCA has dropped some warnings about what we can expect.
Tell us about the policy statement
The policy statement follows on from the Consultation Paper (CP22/2) published in January – summarizing feedback from that Consultation Paper and setting out the FCA’s final policy on how it will strengthen financial promotion rules for high-risk investments. The final rules reflect the FCA’s more hands-on approach and reflect its commitment to a new consumer investment strategy, which is very broadly focused on giving customers the help and support they need to make effective investment decisions.
Although crypto asset promotions will remain outside the FCA’s remit until the Treasury legislates to bring digital assets under the financial promotions regime, the Policy Statement confirms that the FCA will finalize rules for crypto assets once this legislation is passed.
Is it the dawn of a new classification?
We understand that the FCA considers cryptoassets to be a high-risk investment, so the rules are likely to follow those for other high-risk investments, and in particular, cryptoassets are likely to be treated as limited mass market investments. This means that there are likely to be some restrictions on the mass marketing of cryptoassets to retail investors.
What will be the impact on customers?
Given that the rules for cryptocurrencies are not directly addressed in the Policy Statement, predicting claims involves a degree of guesswork. However, given that cryptoassets are likely to follow limited mass market investment requirements, the requirements when it comes to the retail market are likely to be: stronger risk warnings; investment promotion bans; evidence-based categorization of clients; a proposed requirement to limit exposure to cryptoassets to 10% of net wealth and stronger tests to ensure products are suitable.
What is the 10% rule?
When investing in a crypto-asset, consumers will likely be required to fill out a so-called Limited Investment Statement. This will likely take the form of a signed statement stating that the individual has not invested more or less than 10% of their net worth in high-risk investments in the last 12 months.
What about risk warnings?
There will likely be a mandatory standard warning that reads: “Do not invest unless you are prepared to lose all the money you invest. This is a high risk investment and it is unlikely that you will be protected if something goes wrong. Take two [minutes] to learn more.”
This will be in addition to personalized risk warning pop-ups for first-time investors. However, the regulator allows some flexibility in the approach, and companies can deviate from the prescribed wording if they can provide a valid reason for doing so. In addition, the FCA does not object to firms including additional investment risks in the warning.
What about suitability assessment requirements?
As for suitability assessment requirements, this will likely include a questionnaire to assess whether the person who acquired the crypto-asset has, for example, the right level of knowledge to understand what they are investing in.
If the consumer fails the test, they will likely have to wait at least 24 hours before retaking the assessment, and the subsequent suitability would have to contain different questions than those asked in the first test. Firms will need to ensure that the way they communicate that the test can be retaken after the 24-hour lockout period is not persistent or persuasive in nature.
Tell us about the game changer: companies that approve financial promotions
The biggest and probably most contentious impact of the new financial promotion rules will be the requirement that a financial promotion be approved by a person authorized by the FCA.
This is about how the market for financial promotion endorsers will develop, who will provide the financial promotion underwriting service, and whether they will properly balance ensuring a competitive and affordable token promoter market against the goal of consumer protection.
In terms of what the approval regime is likely to require, all promotions will need to include, at a minimum, the approver’s business reference number and the date the promotion was approved.
The approving firm will be required to self-assess whether it has the relevant expertise to approve or communicate financial promotions, and to take an ongoing and active role in reviewing the suitability of the promotion throughout its duration.
What next?
While everything I’ve mentioned here is subject to change – and indeed the Policy Statement does not expressly set out proposed final rules for cryptoassets – what is clear is the likely general direction of travel. As such, firms should take a proportionate approach as part of preparing for likely new changes. In particular, businesses should consider whether they are properly disclosing the risks surrounding the cryptoassets they are selling and whether they are selling them to the right target market.
Because, at the end of the day, it’s better to be a firm that sets the pace for good practice than a firm that struggles to keep up.
James Burnie FRSA, Partner, gunnercooke llp
Financial Services EMEA Regulators and Government
