Letter highlights FCA’s concerns over ‘high-risk nature’ of cryptoassets

Jonathan Cavill of Pinsent Masons said the FCA’s letter to fintech CEOs (4 pages /147KB PDF) further emphasised the FCA’s concerns about the “high-risk nature” of cryptoassets. “The FCA is acutely aware of the allure cryptoassets have on certain consumers, and the fact that, for the time being at least, consumers cannot expect protection from the Financial Services Compensation Scheme should their investment go wrong.”

“This, along with the continued pressure from parliament round cryptoassets, means that crypto firms are likely to find the FCA quick to react to a failure to abide by the new financial promotions rules,” Cavill said. The letter highlighted the four lawful ways to communicate cryptoassets promotions to UK consumers, which include when the promotion is communicated by an authorised person and when it is communicated by an unauthorised person with the approval of an authorised person.

Cryptoasset promotions can also be lawfully communicated by cryptoasset businesses that registered with the FCA under the 2017 Money Laundering, Terrorist Financing and Transfer of Funds Regulations (MLRs). The FCA said it anticipated this being the method used by most cryptoassets businesses, but reminded cryptoassets firms that it is not its role to work with applicants to prepare their applications for registration. If cryptoasset businesses need help in preparing their application, they should seek independent legal advice, the regulator said.

Cryptoasset promotions that otherwise comply with the conditions of an exemption in the 2000 Financial Services and Markets Act (Financial Promotion) Order 2005 are also considered lawful. Promotions that are not made using one of these methods will be in breach of FSMA, which is a criminal offence.

According to the letter, unregistered or unauthorised cryptoasset businesses marketing to UK consumers should think about which of the four legal routes they will use to make their financial promotions; and how they will meet the requirements of that route and the associated FCA rules that apply to cryptoasset promotions.

In line with the regulatory design principle of “same risk, same regulatory outcome”, the FCA said it would take a similar approach to cryptoassets to that taken for other high-risk investments. The FCA said this requires firms to use specific risk warnings and positive frictions in their consumer journeys, such as a 24-hour cooling off period for first time investors, in addition to the overarching requirement that their promotions are fair, clear and not misleading.

Cavill said: “The FCA has made clear it does not want consumers to be pressured, misled, or inappropriately incentivised to invest in cryptoassets. Therefore, with the Consumer Duty coming into force on 31 July 2023, regulated cryptoasset firms should consider how their financial promotions will achieve good consumer outcomes and appropriately protect consumers from any high-risk investments. The FCA has of course also announced recently proposed new guidance on communications and financial promotions on social media, which will be relevant to this as well.”

The FCA has also said that unregistered or unauthorised cryptoasset firms should consider how they will deal with UK customers if they are unable to communicate financial promotions to them. The regulator has previously stated that it will expect firms to clearly communicate any changes to services they will provide to UK consumers and give consumers adequate time to respond to any changes before they go into effect. Firms that decide to no longer provide services to UK consumers will be expected to draw up orderly wind-down plans to minimise any impact on UK consumers.

Tom Aries of Pinsent Masons said: “Given the robust messaging the FCA has sent on the financial promotions of cryptoassets, it appears likely the FCA will seek to act quickly and decisively against any firms that does not follow the financial promotion rules when marketing cryptoassets following 8 October 2023. The FCA has also been at pains to remind cryptoasset firms that promotions that are not made by lawful routes is a criminal offence punishable by two years in prison, an unlimited fine, or both.”

“Cryptoasset firms marketing to UK consumers will therefore need to take great care that they can legally do so and do so in a way that ensures they do not fall foul of the financial promotion rules. For many cryptoasset firms such regulatory requirements will be new to them, and they should be careful not to underestimate the complexity of them,” he added.