In a further example of UK cryptoasset regulation, the FCA recently published its Guidance on Cryptoasset Financial Promotions (here) (the Guidance). This follows the enactment of the Financial Services and Markets Act 2000 (FSMA) (Financial Promotion) (Amendment) Order 2023 in June 2023, which brought cryptoassets within the FCA’s regulatory perimeter (see here), and the introduction of the FCA’s rules on cryptoasset financial promotions in October 2023 (see here).
While the Guidance does not give rise to new regulatory obligations, it provides a very helpful outline for firms - in particular, on the “central requirement” that financial promotions must be fair, clear and not misleading - and the FCA has indicated adherence to the Guidance will indicate compliance with the rules.
What is a financial promotion?
Under FSMA only authorised persons may communicate financial promotions, or such promotions must be approved by an authorised person. Financial promotions include advertisements in traditional media or social media posts.
Since October 2023, “qualifying cryptoassets” (broadly, any fungible and transferable cryptoasset) fall within the financial promotions regime. However, certain cryptoassets, including NFTs and cryptoassets which are considered electronic money, fall outside the scope of the regime. Further, there is a cryptoasset-specific exemption in the legislation which permits businesses which are registered with the FCA under the Money Laundering Regulations, but not otherwise authorised persons, to communicate their own cryptoasset financial promotions.
What does a financial promotion need to contain?
It will be vital that firms ensure promotions are clear, fair and not misleading. Materials must:
- be clear and comprehensible having regard to the information needs of the likely recipients;
- enable a clear understanding of risks, and present a balanced view giving equal prominence to risks and rewards;
- avoid exaggerated claims, particularly regarding potential returns, and not omit relevant information;
- disclose costs, fees and charges; and
- be based on accurate and up-to-date information. Where information is included on past performance, a warning must be included that this is not an accurate indicator of future performance.
In addition to general principles applicable to cryptoasset promotions, the Guidance sets out requirements for the promotion of certain types of cryptoassets, including:
- For stablecoins, firms need to conduct due diligence on any claims made about stability or links to a fiat currency, and be able to demonstrate those claims are accurate.
- For commodity or asset-backed cryptocurrencies, firms need to set out what particular model or arrangement is used. The Guidance indicates the promotion will not be ‘clear, fair and not misleading’ unless it sets out: proof of ownership of the underlying commodity or asset, evidence of any custodian and details of the custody agreement, clear terms of redemption for consumers (including timing and fees), the risk the customer loses money if the issuer or custodian becomes insolvent, and any reasonably foreseeable dependencies that might significantly affect the value or volatility of the underlying asset.
- For complex yield cryptoasset models or arrangements (where a person invites individuals to transfer or make available their cryptoassets to them, in exchange for a rate of return), the promotion should disclose any known risks specific to that model, such as counterparty risk, credit risk, investment risk, and transparency of onward arrangements.
How does this interplay with other duties owed by financial institutions?
Firm’s obligations under the Consumer Duty (see here for an overview) will also apply to cryptoasset promotions. This builds upon the duty to ensure communications are clear, fair and not misleading, and means firms must act in good faith towards consumers, avoid causing them foreseeable harm and enabling them to pursue their financial objectives. While the Consumer Duty does not require firms to ensure consumers always receive good investment returns, the Guidance notes that if all customers are losing money, firms should consider whether the continued promotion of that cryptoasset is consistent with the Consumer Duty’s outcomes.
The Guidance notes that firms are expected to carry out significant due diligence on the relevant cryptoasset prior to its promotion. The scope of this will vary having regard to the form of promotion, its content, the nature of the cryptoasset and the likely characteristics of consumers. Firms should consider the authenticity and accuracy of the proposition (including running background checks), take steps to ensure it is not associated with financial crime, consider the operational or technological risks (eg risks relating to the blockchain it uses and its vulnerability to hacks or code exploits), understand the environmental, social and governance risks associated with the cryptoasset, and conduct legal and compliance checks.
Key takeaways
The Guidance makes clear that the FCA continues to view cryptoassets as high-risk investments, and considers that, given the “novel risks” and sometimes “opaque” nature of cryptoassets, retail investors are more likely not to fully understand these investments or their risks.
Compliance with the rules is a clear priority for the FCA, issuing 146 alerts regarding firms that may not be properly adhering to the regime on the first day of the rules’ enactment.
As a result, it will be important for firms to have effective systems and controls in place to monitor the compliance of their promotions, and be able to amend or withdraw promotions if market developments mean the promotion no longer remains compliant.