From 8 October 2023, marketing of cryptoassets in the UK will be subject to a general restriction on financial promotions,1 breach of which is a criminal offence. The restriction will apply to communications capable of having an effect in the UK, even if communicated from offshore. The application of the general restriction on financial promotions to cryptoassets has been brought forward by the UK government under the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (FPO23).
Hand in hand with this development, the UK Financial Conduct Authority (FCA) has unveiled new and near-final rules in Policy Statement 23/6 (PS23/6)2 that will apply to:
- 'authorised persons'3, which includes firms authorised under Part 4A of the Financial Services and Markets Act 2000 (FSMA), but does not include firms authorised under the Electronic Money Regulations 2011 or the Payment Services Regulations 2017; and
- 'MLR-registered firms', which means cryptoasset businesses4 registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR).
These firms are able to communicate financial promotions relating to cryptoassets but will need to do so in accordance with the new rules, which include a cooling-off period for first time investors, a client categorisation process and an appropriateness assessment.
From 8 October 2023 a person must not, in the course of business, communicate an invitation or inducement to engage in certain controlled activities relating to cryptoassets unless the communication:
- falls within an exemption under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). The legislative changes disapply certain of the standard FPO exemptions with respect to cryptoassets (see below), but apply a new exemption for MLR-registered firms, provided they comply with rules on cryptoasset promotions applicable to FCA authorised persons; or
- is made or approved by an 'authorised person' such as firms licensed to carry on regulated activities under Part 4A FSMA; this does not include firms authorised by the FCA under the Electronic Money Regulations 2011 or the Payment Services Regulations 2017 and, accordingly, communications by these firms will need to fall within an FPO exemption, unless they are MLR-registered firms.
This article focusses primarily on the application of the general restriction on financial promotions to cryptoassets. A summary of the new rules that FCA authorised persons and MLR-registered firms need to comply with is available here. These new rules reflect the FCA's decision to treat cryptoassets as 'Restricted Mass Market Investments' (RMMIs) which can be marketed to UK retail investors, subject to certain restrictions.
How will the general restriction on financial promotions apply to cryptoassets?
The changes to legislation under FPO23 will extend a well-established restriction on the communication of financial promotions to 'qualifying cryptoassets'. This definition covers any cryptographically-secured digital representation of value or contractual rights that is transferable and fungible. Cryptoassets that meet the definition of electronic money or an existing controlled investment (such as a share, or unit in a collective investment scheme) are excluded from this definition, as are certain 'limited use' cryptoassets that meet specified conditions and cryptoassets that cannot be transferred or sold other than through redemption with the issuer. The restriction will apply to the communication (including causing the communication) of an invitation or inducement which would result in either party engaging in certain 'controlled activities' in relation to qualifying cryptoassets, being:
- dealing as principal and/or agent;
- arranging transactions;
- managing;
- providing investment advice; or
- agreeing to carry on the activities set out above.
Cryptoasset market participants who are unfamiliar with these concepts will be able to read over existing rules and guidance on these activities and apply them to a cryptoasset context.
What is the jurisdictional scope of the restriction?
The restriction will apply to communications capable of having an effect in the UK, even if communicated from offshore. The test is technology neutral and can certainly bite on digital communications, whether directed at single persons or more broadly to a market. Additional clarity is provided by section 418 FSMA and non-UK persons may be able to fall within the exemptions in the FPO available to 'overseas communicators'; however, these exemptions are only available in limited circumstances.
What approach does FPO23 take to exemptions from the financial promotion restriction?
The restriction on communicating an invitation or inducement to engage in a controlled activity relating to cryptoassets is disapplied where the communication meets the conditions of an exemption in the FPO.
The FPO sets out a number of exemptions that have developed over time and it will be for potential promoters to determine if an exemption meets their circumstances. The exemptions tend to focus on narrow circumstances that are considered exceptional given broader policy considerations. In terms of particular points to note:
- FPO23 disapplies the exemptions set out in Article 51 (associations of high net worth or sophisticated investors) and Article 61 (sale of goods and supply of services) of the FPO in relation to qualifying cryptoassets;
- the Article 48 (high net worth individual) and Article 50A (self-certified sophisticated investor) exemptions in the FPO only apply to certain investment types comprising or related to unlisted securities. Accordingly, these exemptions will not cover controlled activities in relation to qualifying cryptoassets; and
- FPO23 introduces an exemption under Article 73ZA of the FPO for MLR-registered firms, but on the basis they comply with the FCA's rules on promotions as if they were an FCA authorised person.
Why are these measures being introduced?
Given the regulator's concerns and identified risks of potential consumer harm, the legislative changes are designed to prevent the marketing of cryptoassets outside of narrow exemptions or by authorised persons and MLR-registered firms. The effect of extending financial promotion restriction to cryptoassets promotions is that the FCA is able to implement rules to moderate promotional activities.
A consequence of the development is that promotional activity will need to be driven primarily through authorised persons and MLR-registered firms, in relation to whom the FCA is developing its rules to moderate cryptoasset promotions in a way that reduces and prevents harm to investors. Separately, the FCA has also launched a consultation (ending 10 August 2023) on how it will approach compliance by authorised persons and MLR-registered firms with the requirement for cryptoasset financial promotions to be fair, clear and not misleading.
What are the consequences of breach?
Promotions not made using one of the legal routes will be in breach of section 21 of FSMA. A breach of the financial promotion restriction is a criminal offence punishable by up to two years imprisonment, a fine, or both.
In PS23/6, the FCA emphasises its commitment to "take robust action against firms beaching [the] requirements" set out through its new rules. Such actions may include financial penalties, requesting that websites in breach are taken down, restrictions being placed on firms to prevent harmful promotions and firms being identified on the FCA warning list.
What is the likely impact on cryptoasset businesses?
From 8 October 2023, anyone that is neither an FCA authorised person nor an MLR-registered firm and that currently communicates cryptoasset financial promotions effective in the UK will be restricted from doing so, unless they are satisfied that an FPO exemption lawfully applies to their communication. Given the narrow nature of available FPO exemptions, the introduction of this restriction will likely have a material impact on business models. An alternative is to identify an authorised person willing to approve cryptoasset financial promotions; however, the cryptoasset communications with still be subject to the new PS23/6 rules, and authorised persons may have limited capacity and will impose costs. In PS23/6, the FCA acknowledges the possibility that additional cryptoasset businesses will seek registration under the MLR, in order to be able to communicate financial promotions without having to rely on the approval of an approved person.
MLR-registered firms can communicate financial promotions relating to cryptoassets but will incur increased compliance costs and require additional resources to do so in accordance with the new PS23/6 rules. This is likely to represent a significant learning curve and MLR-registered firms should act to implement appropriate compliance systems and controls, assessing across their promotional material, websites, social media accounts, apps and other distribution channels, as well as acting to adapt client on-boarding processes.
What should Part 4A authorised persons consider?
Authorised persons will already have systems and controls in place for the communication and/or approval of financial promotions. However, compliance frameworks will need to be updated to reflect the new PS23/6 rules (summarised here).
Authorised persons approving financial promotions on behalf of non-authorised persons and non-MLR-registered firms will also need to consider the enhanced standards applying to this role:
- all legally approved promotions will need to include the name of the authorised person approving the promotion and the date of approval, or otherwise the authorised person's Firm Reference Number (FRN); and
- firms will need to monitor the promotion on an ongoing basis, obtaining attestations every 3 months that there has been 'no material change' concerning the customers that received approved promotions, for the lifetime of the approved promotion, in addition to other measures.
In addition, legislation is currently making its way through the UK Parliament to implement a regulatory gateway. This gateway will require authorised persons to apply for permission to the FCA in order to approve cryptoasset financial promotions for non-authorised persons.
1 Section 21, FSMA.
2 PS23/6 Financial promotion rules for cryptoassets.
3 As defined under Section 31, FSMA.
4 Cryptoasset exchange providers and custodial wallet providers.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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