On 2 November 2023, the Financial Conduct Authority (FCA) published its finalised non-handbook guidance on cryptoasset financial promotions (the guidance) (FG23-3 Finalised non-handbook guidance on Cryptoasset Financial Promotions). This follows the new rules on the promotion of cryptoassets that took effect from 8 October 2023 (PS23/6 Financial promotion rules for cryptoassets; see News brief.
The guidance itself:
- Clarifies how firms can comply with the new cryptoasset promotion rules.
- Confirms that firms acting in accordance with the guidance will be treated as compliant.
The FCA has previously highlighted common issues with cryptoasset financial promotions, including marketing claims about safety, security or ease of use without highlighting risks and, generally, risk warnings not being visible enough. The guidance seeks to remedy these failings and is driven by the FCA’s operational objective of ensuring appropriate consumer protection.
Who should read the guidance?
The guidance is relevant to anyone communicating, or considering communicating, cryptoasset promotions to UK consumers, regardless of where they are based. This includes authorised firms, registered persons under the bespoke exemption in Article 73ZA of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529), and typically unauthorised firms or individuals such as cryptoasset firms, platforms and so-called “finfluencers”.
Approvers
The guidance addresses authorised firms approving other firms’ cryptoasset promotions, including the requirement for those firms to have the appropriate competence and expertise to do so. In addition, from 7 February 2024, they will need specific permission from the FCA.
Firms that approve cryptoasset promotions must ensure that they comply both with the relevant financial promotion rules in the FCA’s Conduct of Business sourcebook as well as relevant rules under the new consumer duty (see “Consumer duty” below and feature article “The FCA consumer duty: breaking new ground”). This is despite the vast majority of cryptoasset firms not being subject to the consumer duty as unauthorised firms.
Fair, clear and not misleading
Given that cryptoassets are relatively new to the mainstream, they are not likely to be fully understood by retail consumers. Firms that promote cryptoassets must, therefore, take great care to consider the information needs of consumers to enable them to make informed decisions.
The critical requirement is that financial promotions must be fair, clear and not misleading. To meet this requirement any person promoting cryptoassets will need to have a clear understanding of what they are promoting and take every care with the content of promotions and the way in which information relating to those cryptoassets is promoted (see “Factors to consider” below).
Stand alone compliance
The FCA expects promotions to be “stand-alone compliant”, meaning that each stage of a financial promotion must comply with the rules. Helpfully though, firms may include links that provide access to supporting information or additional disclosures, particularly for complex investments. However, holding back information on key risks until later stages of the consumer journey would be a breach of the rules.
Consumer duty
Authorised firms are required to consider their obligations under the consumer duty in how it applies to cryptoasset promotions. The consumer duty builds on the central requirement that promotions are fair, clear and not misleading, and has raised the bar in all areas of retail financial services. Of particular significance are the consumer duty’s cross-cutting rules consisting of obligations to act in good faith, avoid causing foreseeable harm and support retail consumers to pursue their financial objectives.
The consumer duty means that cryptoasset promotions must be delivered by an appropriate method over suitable communication channels and must, in respect of the intended consumers:
- Address their specific information needs.
- Be capable of being understood by them.
- Enable properly informed decision-making.
- Take account of vulnerabilities.
The FCA does not expect firms to protect their customers from risks that they reasonably believed the customer understood and accepted, such as investment losses, but questions may be raised if all, or a significant proportion, of their customers are losing money.
Diversity of cryptoassets
The diverse variety of cryptoasset products and services, together with the diverse nature of the consumer audience, means that promoters must consider the specific nature and risk profile of the product or service before publishing any promotions.
Caution should be taken with any promotions that are linked to stablecoins or other forms of cryptoasset that purport to offer stability or link to fiat currency (see Briefing “Stablecoins and central bank digital currencies: a developing landscape”). Any such claims should be subject to an appropriate level of due diligence so that the person making them can demonstrate to the satisfaction of the FCA that they are genuine. The FCA has confirmed that it will regard cryptoassets that claim stability by relying on algorithms or a resource of other cryptoassets to be non-compliant with the rules.
The FCA has raised specific concerns around commodity and asset-backed cryptoassets. Persons making promotions around these should be able to:
- Demonstrate the modelling used.
- Prove ownership of the underlying asset or commodity.
- Identify the custodian of the underlying asset or commodity and its location.
- Provide clear terms of redemption.
- Make prominent and appropriate risk warnings.
- Clarify dependencies that might affect the underlying asset.
Care should be taken around cryptoasset promotions that concern any complex arrangements, such as staking, lending and borrowing, which carry similarly complex risks and indeed consideration should be given to whether such investments are appropriate for retail consumers at all. In relation to this type of cryptoasset investment, the FCA would expect to see clear justification for prospected rates of return, full and clear disclosure of legal and beneficial ownership of a consumer’s cryptoassets, clear and full disclosure of any fees or other charges, evidence of appropriate systems and controls, and evidence of a consumer’s understanding of the model and awareness of the risks associated with it.
Due diligence
Firms must conduct due diligence to ensure that they fully understand the product or service that is being promoted and all of the promotional claims that are being made. Appropriate due diligence is required to make an accurate and clear disclosure of risk, ensure that promotions are fair and support good consumer outcomes.
The level of due diligence required will vary on a case-by-case basis and firms should not accept at face value information that is provided by an unregulated person. However, firms may be able to rely on information and analysis that has been properly prepared by independent professional advisers.
A tough stance
The FCA has shown that it is not afraid to take action against non-compliant cryptoasset promotions, including placing restrictions on authorised firms that approve cryptoasset financial promotions and issuing hundreds of alerts against non-compliant firms since the rules came into force. Although the guidance highlights the areas that firms must consider if they are to make or approve cryptoasset promotions, firms must carefully consider how they can demonstrate compliance with the regime given that this remains an active space for regulatory intervention.
Industry view
While the guidance provides some helpful indications of how firms can ensure that they comply with the regime, particularly for authorised and exempt firms that issue their own promotions, the guidance may not remedy the wider issues that many cryptoasset firms now face in respect of the approval process.
With a limited number of authorised firms (a number that is below anticipated levels) having come through the FCA’s financial promotions approver gateway, cryptoasset firms may struggle to find suitable firms to approve their promotions. As a result, there will likely be an increase in market concentration risk. This, combined with increased regulatory scrutiny, the application of the consumer duty to authorised firms making and approving cryptoasset promotions, and the consequences of getting it wrong, means that the industry is likely to face considerable challenges beyond compliance with the rules themselves.
Factors to consider
Particular factors for firms to consider when ensuring that a cryptoasset promotion is fair, clear and not misleading include:
- Ensuring that all promotional materials are presented in a way that is easy to understand by consumers, and free from jargon and complex language.
- Enabling consumers to take an informed view on the risks of investing in cryptoassets and not taking advantage of consumers’ lack of experience or knowledge.
- Providing a balanced view of the potential risks and rewards.
- Not omitting relevant information, such as in relation to costs.
- Ensuring that supporting information provided is accurate, up-to-date and substantiated.
- Providing a reminder of the rules regarding information on past and future performance.
- Disclosing fees and charges.
- Effective monitoring of promotions and amending or withdrawing promotions where they are no longer compliant.
This article was written by Head of Fintech Martin Cook, associate Brandon Wong and practice development lawyer Kerry Berchem.
This article first appeared in the December 2023 issue of PLC Magazine.