On 8 June 2023, the FCA published PS23/6 outlining its final rules restricting the marketing of cryptoassets in the UK which were initially discussed in CP22/2 and PS22/10. The rules are largely being implemented as consulted on, with cryptoassets being defined as "Restricted Mass Market Investments" (RMMI). The new requirements will come into effect on 8 October 2023.
Routes to Promoting Cryptoassets
Financial promotions for cryptoassets can only be issued if:
- The promotion is communicated by an authorized person
- The promotion is made by an unauthorized person but approved by an authorized person
- The promotion is communicated by a cryptoasset business registered with the FCA under the Money Laundering Regulations (MLRs)
- The promotion is otherwise communicated in compliance with the conditions of an exemption in the Financial Promotion Order (the application of which is limited when it comes to crypto-asset promotions)
Whilst the new rules do not go so far as banning the mass marketing of cryptoassets, they introduce several restrictions on doing so.
Key Aspects of the Requirements
Prescribed Standardized Warnings and Risk Summaries
Firms promoting cryptoassets will generally be required to include a prominent prescribed risk warning which reads: Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong. Take 2 mins to learn more. Firms will need to ensure these risk warnings are highly prominent on their websites and through any other marketing mediums.
Banning Incentives to Invest
All monetary and non-monetary incentives to invest are banned such as referral and sign-on bonuses. Unlike other RMMIs, cryptoasset promotions will not be able to rely on the "shareholder benefits" exemption, meaning a blanket ban on incentives to invest in cryptoassets.
Additional Steps for Direct Offer Financial Promotions
A Direct Offer Financial Promotion (DOFP) arises where a financial promotion specifies the manner of response or includes a form by which any response may be made, e.g., a “buy now” button. Where a firm wishes to promote a DOFP, they must meet four conditions:
- Cooling-off Period
A 24-hour cooling-off period will be in place for first-time investors. This means that first-time investors cannot receive a DOFP until 24 hours have elapsed from their initial request to view the DOFP. They must also reconfirm their request to proceed after the 24 hours have elapsed. Whilst the promotion cannot be shown to the client, a firm can otherwise complete KYC/AML checks and client categorization. The aim here is to create a “sludge” practice to the investment process, giving consumers an opportunity to rethink whether the investment is right for them.
- Personalized Risk Warnings
For first-time investors, a personalized risk warning is required (in addition to the previously mentioned warning), which must include the consumer’s name in the form of a pop-up or equivalent. This must be completed prior to client categorization and appropriateness assessment stages.
- Investor Categorization
There are three categories applicable to retail clients investor categorization when promoting a DOFP:
- Certified as a “high-net-worth investor” (earning £100,000 or more annually or with net assets over £250,000)
- Certified as a “sophisticated investor” (An investor that has been certified by an authorized person as sophisticated.)
- Certified as a “restricted investor” (An investor that confirms that they have not in the last 12 months nor will in the forthcoming 12 months invest more than 10% of their net assets into RMMIs.)
When signing high-net-worth investor declarations, consumers will need to state why they meet the respective criteria. Firms will then be required to ensure that the amounts stated by the retail clients are in line with the high-net-worth investor criteria.
- Appropriateness Tests
The appropriateness tests (determining whether a customer has the requisite knowledge to understand the investment) will become more stringent. For example, if a customer fails an appropriateness test twice, the customer cannot repeat that test within 24 hours. Authorized firms promoting should consider, in line with their Consumer Duty obligations, if it’s appropriate that an investor can continue to retake the appropriateness test if they fail more than twice. Importantly, the questions firms ask prospective consumers must be different each time a consumer is subject to the test.
Section 21 Approvers
Firms approving financial promotions on behalf of unauthorized persons must comply with certain rules, such as, but not limited to:
- A prescribed format on how firms should detail who has approved the financial promotion
- Firms to ensure they have the necessary “competence and expertise” in an investment product or service before approving or communicating a relevant financial promotion
- Introduction of a “no material change” attestation that approvers must seek from firms every three months for the lifetime of an approved promotion and ongoing monitoring of promotions
How Kroll can help?
Kroll has expertise in compliance, risk and regulation including assisting global crypto/virtual asset service providers with all aspects of their governance, risk management and compliance infrastructures.
Our Financial Services Compliance and Regulation team includes industry practitioners and ex-regulators, with a wide range of regulatory subject matter expertise, including financial promotions and cryptoassets.
Kroll can provide a range of services to help ensure compliance against the new regulations, including:
- Assisting authorized and MLR registered firms to implement the new requirements
- Assessing firms’ (in particular, S21 approvers') financial promotion systems and controls
- Supporting firms in achieving FSMA Part 4A authorization and MLR registration with the FCA
Kroll also offers a wide range of cryptoasset services across multiple jurisdictions. For more information about our offerings, please see here.
