The new rules, which are expected to come into effect on 8 October 2023, mandate that firms only market cryptoassets to consumers with the appropriate knowledge and experience to invest.
Alongside the Policy Statement, the FCA has also published a Guidance Consultation entitled "Guidance on cryptoasset financial promotions" (GC23/1) which contains guidance on ensuring that promotions involving cryptoassets are clear, fair and not misleading (the "Guidance Consultation").
This article summarises the key provisions of the Policy Statement and the Guidance Consultation.
- The Policy Statement
The Policy Statement is intended to be directly relevant to the following groups of market participants:
- consumers investing, or who are considering investing, in cryptoassets;
- cryptoasset businesses registered with the FCA;
- cryptoasset businesses considering, or in the process of, registering with the FCA;
- overseas cryptoasset firms marketing, or considering marketing, to UK consumers;
- authorised firms considering communicating or approving cryptoasset financial promotions;
- trade bodies for the cryptoasset sector; and
- other persons involved in communicating cryptoasset financial promotions to UK consumers.
Following the general categorisation approach proposed in CP22/2, the Policy Statement categorises cryptoassets as ‘Restricted Mass Market Investments’ ("RMMI"). RMMI may be mass marketed to UK consumers subject to certain restrictions, as specified in the Policy Statement, in addition to the overarching requirement that financial promotions must be fair, clear and not misleading, as set out in the Guidance Consultation.
The main restrictions outlined in the Policy Statement include, amongst others:
Risk Warnings. The marketing of RMMI must include risk warnings and relevant risk summaries. The FCA has prescribed a standard risk warning, which reads:
“Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.”
In addition, a personalised warning for first-time investors with a firm must be provided, before any promotions of RMMI could be communicated. The proposed prescribed wording for such warnings reads:
"[Client name], this is a high-risk investment. How would you feel if you lost the money you’re about to invest? Take 2 min to learn more."
In each case, the ‘Take 2 min to learn more’ must link to a product-specific risk summary.
Cooling-off period. There will be a minimum 24-hour cooling-off period for first-time investors with a firm. The 24-hour cooling-off period starts from when the consumer requests to view a so-called Direct Offer Financial Promotion (DOFP) – a defined term capturing the vast majority of financial promotions. However, firms would be allowed to proceed with other parts of the consumer journey while the cooling-off period applies (e.g. "Know Your Customer" / "Anti-Money Laundering" checks, client categorisation and the appropriateness assessment, referenced below).
In practice, a firm would not be allowed to make a DOFP to a consumer unless the consumer has reconfirmed their request to proceed after the cooling-off period has expired.
Banning incentives to invest. The Policy Statement prohibits incentives like ‘refer a friend’, as those could unduly influence consumers’ investment decisions and cause them to invest without fully considering the risks involved.
However, benefits that are intrinsic to the cryptoasset or exclusively bound up with its function (e.g. ticket access linked to the ownership of NFTs) would not be considered 'incentives'.
Client categorisation. Before a DOFP can be made in relation to an RMMI, the consumer must be categorised as a "Restricted", "High Net Worth", "Self-certified Sophisticated" or "Certified Sophisticated" investor. This requires the investor to sign a declaration stating that they meet the relevant criteria to be categorised as such. The FCA proposes that DOFPs in relation to cryptoassets are only allowed to "Restricted", "High Net Worth" and "Certified Sophisticated" investors, and not "Self-Certified Sophisticated" ones.
Appropriateness assessments. Before an application or order for an RMMI could be processed in response to a DOFP, a firm must assess the specific RMMI as appropriate for the consumer. This requires a determination that the customer has the necessary experience and knowledge to understand the risks involved in relation to the specific product.
The Policy Statement also confirms the FCA's intention to introduce record-keeping requirements relating to client categorisation and appropriateness assessments.
- The Guidance Consultation
In the Guidance Consultation, published alongside the Policy Statement, the FCA seeks feedback on its proposed guidance on how firms can comply with the requirement that cryptoasset financial promotions are fair, clear and not misleading.
The FCA proposes the following list of matters that firms must consider when assessing whether a promotion is fair, clear and not misleading:
- Clarity and comprehension of the promotion: Promotional materials must be presented in a way that is easy to understand by consumers, having regard to the information needs of the likely recipients of the promotion.
- Providing a balanced view of information: Firms should not be giving a prominent promotion of the benefits without providing an equally prominent indication of the risks involved.
- Exaggerated claims: Firms should avoid making exaggerated claims about the potential benefits of cryptoassets.
- Omission of relevant information: Firms should not omit relevant information that would affect the ability of consumers to make an informed decision about the overall investment proposition.
- Accuracy of information: All supporting information in the financial promotion, such as facts, figures, and statements, must be accurate, up-to-date, and substantiated.
- Past and future performance: Where the information contains an indication of future performance, firms should ensure that information is based on reasonable assumptions supported by up-to-date data. Past performance should not be referred to as a reliable indicator of future results.
- Disclosure of costs, fees and charges: Firms should clearly outline any costs, fees and charges associated with their products. This could include transaction fees, exchange fees, platform fees, and any other charges.
- Effective systems and controls: Firms should have effective systems and controls to monitor the compliance of their promotions with relevant rules and be able to amend or withdraw promotions in light of market developments.
- Stablecoins: Firms must be able to demonstrate that claims of stability or links to a fiat currency are genuine. For example, by providing details of how the form of stability is maintained and details of any assets used to maintain the stability. Firms should not use terms that could mislead consumers such as “inflation resistant”.
The Guidance Consultation also contains specific rules relating to more complex cryptoassets - those backed by a commodity, as well as complex yield cryptoasset models or arrangements.
- Promotions of cryptoassets backed by a commodity or an asset: The FCA expects firms to clearly set out what particular model/arrangement the cryptoasset uses. For example, whether the cryptoasset only tracks or refences the value of the underlying commodity or asset, or whether the cryptoasset acts as a digital representation of ownership of the underlying commodity or asset.
- Financial promotions for complex yield cryptoasset models or arrangements: A financial promotion of a complex yield model or arrangement would be unlikely to be considered as fair, clear and not misleading, unless it sets out with sufficient clarity and prominence the following:
- Clear evidence of how the advertised rates of return can be achieved;
- Clear and prominent disclosure of any fees, default rates, commissions, or other charges;
- Where firms are offering a target rate of return, demonstration they have appropriate access to data, systems and controls in place to ensure all targeted rates of return are kept up-to-date;
- Clear and prominent disclosure of the legal and beneficial ownership of a consumer’s cryptoassets once they enter into an arrangement;
- That the consumer is aware of the business model of the firm and all relevant risks associated with the model or arrangement.
In addition, firms must clearly and prominently disclose the legal and beneficial ownership of a cryptoasset before a consumer enters into an agreement with a firm. In particular, they should clearly and prominently disclose ‘who’ owns the legal and beneficial rights to the cryptoasset.
Finally, the Guidance Consultation contains a reminder that a firm should not indicate or imply that it is authorised by the FCA in respect of business for which it is not so authorised, nor should it indicate or imply that it is regulated or otherwise supervised by the FCA in respect of business for which it is not regulated by the FCA.
The Guidance Consultation is open for responses until 10 August 2023.
DAC Beachcroft’s Technology and Financial services lawyers advise some of the world’s leading businesses and our team has a breadth of expertise in cryptoassets and DLT/blockchain.