FCA promises “robust action” against firms breaching crypto marketing rules
The UK financial regulator Financial Conduct Authority (FCA) has announced that all cryptoasset firms marketing to UK consumers, including firms based overseas, will soon need to comply with the new UK financial promotions regime. Firms must start preparing now for this regime.
The FCA said that it will take “robust action” against firms breaching these requirements.
In January 2022, the UK Government published a consultation response setting out its intention to legislate to bring the promotions of certain cryptoassets within the FCA’s remit. This regime will apply to all firms marketing cryptoassets to UK consumers regardless of whether the firm is based overseas or what technology is used to make the promotion.
On 1 February 2023, the Government published a policy statement on its approach to cryptoasset financial promotions regulation. The policy statement sets out the Government’s intention to introduce a bespoke exemption in the Financial Promotion Order for cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds.
This exemption will enable cryptoasset businesses which are registered with the FCA under the MLRs, but who are not otherwise authorised persons, to communicate their own cryptoasset financial promotions to UK consumers. The policy statement also set out the Government’s intention to reduce the implementation period for the regime from 6 months to 4 months from the relevant legislation being made in Parliament.
Subject to Parliamentary approval, when the regime comes into force there will be 4 routes to communicating cryptoasset promotions to UK consumers:
- The promotion is communicated by an FCA authorised person.
- The promotion is made by an unauthorised person but approved by an FCA authorised person. Legislation is currently making its way through Parliament which, if made, would introduce a regulatory gateway that authorised firms will need to pass through in order to approve financial promotions for unauthorised persons.
- The promotion is communicated by a cryptoasset business registered under the MLRs with the FCA.
- The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.
For these purposes, a firm only authorised under the Electronic Money Regulations or the Payment Services Regulations is not considered an ‘authorised person’ and so cannot communicate or approve financial promotions. This is set in legislation and cannot be modified by FCA rules.
Promotions that are not made using one of these routes will be in breach of section 21 of the Financial Services and Markets Act 2000 (FSMA), which is a criminal offence punishable by up to 2 years imprisonment.
The regulator said that it will publish its final rules for cryptoasset promotions once the relevant legislation has been made. Subject to any changes in circumstances, the FCA expects to take a consistent approach to cryptoassets to that taken in the new rules, in place from 1 Feb 2023, for other high-risk investments. This would mean firms being required to use specific risk warnings and positive frictions (such as a 24-hour cooling off period) in their consumer journeys, in addition to the overarching requirement that their promotions are clear, fair and not misleading. Further details are set out in the FCA’s Consultation Paper (CP22/2) and Policy Statement (PS22/10) for high-risk investments.
Cryptoassets remain high risk. The FCA has repeatedly warned that consumers should be prepared to lose all of their money if they buy cryptoassets. Recent events such as the high-profile failure of several cryptoasset firms further highlight the riskiness of these products. There is unlikely to be any compensation under the Financial Services Compensation Scheme for consumers who lose money.
Cryptoasset businesses marketing to UK consumers, including firms based overseas, must get ready for this regime.
Acting now will help ensure they can continue to legally promote to UK consumers. The regulator encourages firms to take all necessary advice as part of their preparations.
The Government intends to grant the FCA supervision and enforcement powers over MLR registered cryptoasset businesses relying on the new bespoke exemption. The FCA said it will take robust action where it sees firms promoting cryptoassets to UK consumers in breach of the requirements of the financial promotions regime. This may include, but it is not limited to, take downs of websites that are in breach, issuing public warnings and enforcement action.
Expectations for cryptoasset businesses applying for Money Laundering registration
As set out in Regulations 8 and 9 of the MLRs, cryptoasset businesses must register with the FCA if they are carrying on certain cryptoasset activities. Cryptoasset businesses are within scope of the MLRs if they provide, by way of business, one or more of the services described in Regulation 14A and this business is carried on in the United Kingdom. More details are available on when firms need to register with the FCA.
Cryptoasset businesses and any person who is an officer, manager and beneficial owner in the business, will be subject to the fit and proper requirements under Regulation 58A of the MLRs. The regulator noted that it will take into account all relevant matters when assessing fitness and propriety, including the businesses’ financial promotions. As part of the fitness and propriety assessment it needs to consider whether a cryptoasset business and any officer, manager or beneficial owner has acted and may be expected to act with probity.
The FCA expects cryptoasset businesses to be ready, willing and organised at the point of their application. This includes having a bona fide UK presence as per Regulations 8 and 9. The applicant should be able to demonstrate they understand the Regulations and evidence compliance with the requirements set out in the MLRs. Applicants will find Chapter 22 of The Joint Money Laundering Steering Group guidance helpful.
Cryptoasset businesses that are already registered under the MLRs will be able to communicate their own financial promotions for cryptoassets, subject to complying with the conditions of the exemption and the relevant FCA rules. They will not have to apply for any further permissions to communicate their own promotions.