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; seeNews 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.