The UK’s Financial Conduct Authority (FCA) has issued a notice to all cryptoasset firms that market their products or services to UK consumers, reminding them of their obligations under the new financial promotion regime that will come into effect on 8 October 2023. The notice also warns of the potential consequences for non-compliance, which could include criminal sanctions and enforcement actions.
What is the new financial promotion regime?
The new financial promotion regime is a set of rules that aim to make the marketing of cryptoasset products or services clearer, fairer, and more accurate, and to protect consumers from the high risks associated with cryptoassets. The rules apply to all firms that communicate or approve financial promotions of cryptoassets in the UK, regardless of where they are based or regulated.
The main features of the new regime are:
- Cryptoasset firms must ensure that their financial promotions are clear, fair, and not misleading, and that they provide sufficient information for consumers to make informed decisions.
- Cryptoasset firms must include prominent risk warnings in their financial promotions, stating that cryptoassets are unregulated and that consumers may lose all their money.
- Cryptoasset firms must not use any incentives, such as ‘refer a friend’ bonuses, to encourage consumers to invest in cryptoassets.
- Cryptoasset firms must implement a 24-hour cooling-off period for consumers who sign up for their services, during which they cannot deposit or trade any cryptoassets.
- Cryptoasset firms must conduct appropriateness tests for consumers who want to invest in cryptoassets, to assess their knowledge and experience of the crypto market and the risks involved.
- Cryptoasset firms must categorise their consumers as either retail or professional, and apply different levels of protection and disclosure accordingly.
Why is the FCA introducing the new regime?
The FCA is introducing the new regime in response to the rapid growth and innovation of the crypto market, which has attracted millions of UK consumers who see the potential of digital currencies and blockchain technology. However, the FCA also recognises that the crypto market poses significant challenges and risks for consumer protection, market integrity, and financial stability.
According to the FCA, many consumers are unaware of the nature and risks of cryptoassets, and may be influenced by misleading or inaccurate marketing materials. The FCA also notes that many cryptoasset firms operate outside of its regulatory perimeter or jurisdiction, and may not comply with its existing rules or standards. The FCA also warns that cryptoassets are vulnerable to operational and cyber risks, fraud and theft, price volatility, regulatory arbitrage, and financial crime.
By introducing the new regime, the FCA aims to enhance its oversight and supervision of the crypto market, and to ensure that consumers have access to clear and reliable information and adequate safeguards when they engage with cryptoassets. The FCA also hopes to foster a more responsible and sustainable development of the crypto industry in the UK.
How will the FCA enforce the new regime?
The FCA has stated that it will take a proportionate and pragmatic approach to implementing and enforcing the new regime. The FCA has indicated that it will consider giving some flexibility to cryptoasset firms that need more time to make technical or business changes to comply with certain aspects of the new regime, such as the cooling-off period. However, these firms must first apply for a modification by consent from the FCA before 8 October 2023.
The FCA has also emphasised that it will not tolerate any breaches or violations of the new regime after 8 October 2023. The FCA has warned that any firm that communicates or approves financial promotions of cryptoassets in the UK without complying with the new rules may be committing a criminal offence punishable by an unlimited fine and/or up to two years imprisonment. The FCA has also stated that it will use its full range of powers to take action against non-compliant firms, including issuing public warnings, imposing fines or suspensions, or revoking registrations or authorisations.
The FCA has urged all cryptoasset firms to familiarise themselves with the new regime and its requirements, and to take immediate steps to ensure compliance by 8 October 2023. The FCA has also published examples of good and poor practice on its website to help firms prepare for the new regime.
The FCA’s notice is a clear signal of its intention to regulate and monitor the crypto market more closely and effectively. The notice also reflects the FCA’s recognition of the benefits and challenges of cryptoassets and their underlying technologies. By introducing the new financial promotion regime, the FCA aims to balance its objectives of promoting innovation and competition in the digital economy, while protecting consumers and maintaining financial stability.