Over the past year, UK’s crypto landscape has changed! The Financial Conduct Authority (FCA) implemented more rigorous financial promotion rules for cryptoassets, effective as of October 2023. Further from February 2024 the new legislation for the Financial Promotions Gateway Regime came fully into force.
The FCA’s decision to impose stricter financial promotion rules reflects the growing concern over the proliferation of cryptoassets and their potential to pose significant risks to investors. As digital currencies continue to gain popularity, regulators are increasingly focused on safeguarding investors against misleading or fraudulent marketing practices and ensuring that firms comply with robust standards of conduct.
In an earlier article that we published in late September, we highlighted the state of cryptoasset firms’ preparations for the financial promotions regime.[1] Even though the FCA’s report cited good practices, most firms faced significant challenges in preparation for the new regime.
Fast forward to the present, this article dives into the four current avenues to legally communicate financial promotions and delves deeper into what that entails for crypto firms to ensure they can remain compliant.
FCA’s Financial Promotions Rules: Current avenues to be compliant.
The new regulations were devised to enhance consumer protection and mitigate the risks associated with cryptoasset investments. One of the critical aspects of these rules is the requirement for crypto firms to obtain Section 21 (s21) approval or Money Laundering Regulations (MLR) registration to market cryptoassets.
The FCA reiterated in a letter to cryptoasset firms on the 4th of July 2023 that there are currently four routes to be compliant:
1.The promotion is communicated by an authorised person.
This is standard as per the Financial Services and Markets Act 2000 (Section 21, FSMA), where the authorised person is generally authorised by the FCA or the Prudential Regulation Authority (PRA).
2.The promotion is made by an unauthorised person but approved by an authorised person.
This means the promotion has been approved by a s21 approver (authorised person), as explained above – they are lawfully able to approve such promotion.
3.The promotion is issued and communicated by a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
Note, not all crypto firms are registered with the FCA under MLR. This means an unregistered crypto firm can market its promotion through the second route noted above, where the promotion is approved by a s21 approver.
4.The promotion otherwise complies with the conditions of an exemption in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Financial Promotion Order).
The exemptions include communications made by a regulated financial institution, including certain financial promotions to self-certified sophisticated investors and to certified high-net-worth individuals. You should consult with your legal counsel about these exemptions which are very specific. The thresholds and criteria for these exemptions were also recently updated.[2]
The letter adds that the promotions that are not made using one of the routes explained above will be in breach of the Financial Services and Markets Act 2000 (Section 21, FSMA), which is a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both.[3] If firms illegally promote cryptoassets to UK consumers the FCA will take robust action such as placing firms on their warning list, “remove or block any illegal financial promotions such as websites, social media accounts and apps and enforcement action.”[4]
Which legal route to follow?
Firms must consider which legal routes they will use by the nature of their business activities and needs.
If a crypto business is in a hurry and whilst they are applying to become registered under the MLRs (route 3), it may be faster for promotions to be approved by a s21 approver (route 2) in the meantime. This is because registering under the MLRs may be time-consuming, as the FCA can take up to three months just to assess the application alone, not including the time it takes to prepare and review the documents thoroughly.
Firms that have the capacity can even both be registered under the MLRs, and therefore allowed to communicate their own promotions, as well as being authorised by the FCA and therefore ‘a s21 approver’, meaning that they can explore new and larger business opportunity.[5] However, this means that these Firms will have ongoing obligations to monitor the promotions, meaning a higher compliance cost, on top of needing to demonstrate and have relevant expertise and competence.[6] This includes conducting due diligence on the other firm’s management, operations, and compliance procedures.
To conclude…
The new rules for Firms (introduced by PS22/10 – Strengthening our financial promotion rules came into effect) included:
- a ban on promoting incentives to invest
- the introduction of a 24-hour cooling-off period for new customers
- a personalised risk warning, clearer client categorisation and the requirement for new consumers to pass a robust appropriateness assessment before being able to commit to the investment.[7]
In response to poor compliance, the FCA provided data and insight resulting from action taken against authorised firms breaching financial promotion rules (between 1 January 2023 to 31 December 2023).[8]
For authorised firms, following the FCA’s intervention, there were 10,008 promotions amended/withdrawn in 2023 which is an increase of 16.6%, compared to 8,582 in 2022. For unauthorised firms and individuals, the FCA issued 2,285 alerts in 2023, an increase of 21% from 1,882 in 2022.[9]
The FCA states that the levels of compliance with the financial promotions rules are still concerning.
Beyond this, as the regime touches a lot of aspects, the FCA will continue to hold s21 approvers to high standards and have even placed requirements on one firm to restrict it from approving cryptoasset promotions while another firm has voluntarily agreed to requirements to restrict it from approving cryptoasset promotions.[10]
In summary, the FCA’s implementation of rigorous financial promotion rules represents a significant development in the regulation of the cryptoasset industry. Cryptoasset firms must adapt to these regulatory changes immediately as the risk of failure is high, and they should prioritise compliance and the demonstration thereof, and uphold the highest standards of conduct to thrive in an increasingly regulated environment.
How Leo can help
In the face of increasingly expensive and time-consuming compliance requirements, using RegTech can provide a competitive advantage. Leo software includes a financial promotion review module that empowers front-end staff to ensure better compliance whilst giving compliance teams enhanced oversight.
Leo’s Financial Promotion Review report helps ensure that promotional materials are configured according to your standards and shared with third party issuers for greater oversight as well as then distributed exclusively to the intended audience. Leo RegTech also Makes sure that your staff can validate promotions and that relevant disclaimers are included, some of which are content-dependent, and it helps you verify the compliance of promotional content against current regulations or as defined by your outside counsel through your own configuration.
By obtaining MLR approval, firms are required to implement robust anti-money laundering (AML) and know-your-customer (KYC) procedures to mitigate the risk of financial crime and ensure the integrity of the cryptoasset market.
With Leo’s new Onboarding Solution, you can streamline client onboarding with configurable KYC and CDD questionnaires. Our Solution integrates background checks (e.g. sanctions/PEPs) alongside ID Verification. It automatically flags any issues and enables efficient resolution tracking with the Remedial Action feature.
If you want to find out more about how Leo can help turn compliance into an asset, click on the link below.
[1] https://leo.tech/cryptoasset-firms-brought-under-uk-financial-promotion-regulations-a-comprehensive-analysis/
[2] https://www.taylorwessing.com/en/insights-and-events/insights/2023/11/changes-to-financial-promotion-exemptions
[3] https://www.fca.org.uk/publication/correspondence/letter-to-cryptoasset-firms-financial-promotions-regime.pdf
[4] Ibid.
[5] https://register.fca.org.uk/s/search?predefined=CA
[6] https://www.orrick.com/en/Insights/2023/06/UK-Cryptoasset-Promotion-Rules-Could-Spell-Trouble-for-Firms-Outside-the-UK
[7] https://www.fca.org.uk/publication/policy/ps22-10.pdf
[8] https://www.fca.org.uk/data/financial-promotions-data-2023
[9] Ibid.
[10] Ibid.
