FCA concerned about crypto ad compliance, including for overseas firms

• FCA says firms have under-appreciated scope of financial promotion regime for cryptoassets. 
• Regulator allows extra time to comply with some new rules… 
• …but majority of tough new regime still kicks in on 8 October 2023. 

With one month to go before the financial promotion regime applies to cryptoassets, the Financial Conduct Authority has issued a flurry of guidance and warnings about non-compliance. The FCA will allow some UK firms to apply for the most onerous requirements to be delayed but worries that many overseas firms are not ready for the new regime.

Good news: MLR-registered firms and authorised persons can now apply to the FCA to delay DOFP compliance

In a letter the FCA explains that firms may apply for a modification by consent to defer some financial promotion rules by three months. This is available to cryptoasset firms registered with the FCA under the Money Laundering Regulations (the MLRs) and authorised firms.

The deferral applies to the direct offer financial promotion (DOFP) rules, which are intended to impose “frictions” in the customer journey for new and existing retail customers of those firms. This means that the relevant firms would not have to comply with the following requirements when marketing cryptoassets to retail clients until 8 January 2024:

• displaying personalised risk warnings;
• imposing a 24-hour cooling off period;
• undertaking client classification to establish that the retail client is a high net worth investor, restricted investor or certified sophisticated investor; and
• appropriateness assessments.

It is important that MLR-registered firms and authorised firms looking to benefit from this deferral apply to the FCA as soon as possible. The deferral will only apply from the date consent is provided by the FCA.

Reminder: The rest of the regime is unchanged and applies from 8 October 2023 as scheduled

This is not a complete push-back of the introduction of the UK’s crypto financial promotion regime.

Restrictions on who can make communications promoting cryptoassets to UK customers will still apply from 8 October 2023. The FCA again takes the opportunity to remind overseas or unregistered cryptoassets firms that they may be committing a criminal offence by continuing to promote cryptoassets to UK customers beyond that date.

Several FCA rules will also apply from this date to MLR-registered and authorised firms as they are not covered by the FCA’s modification by consent. These include:

• the core requirement for crypto financial promotions to be fair, clear and not misleading;
• the restrictions on monetary or non-monetary incentives to invest (e.g. first time investor bonuses and referral bonuses); and
• the requirements for financial promotions relating to cryptoassets to be accompanied by risk warnings and risk summaries.

Warning: Significant changes to business models required

The FCA has reviewed firms’ readiness for the new regime and provided examples of good and poor practice. It is worried that many firms have under-appreciated the regime’s broad scope and nature.

Key comments from the FCA’s guidance include:

• The FCA says that it expects that the vast majority, if not all, websites and apps that enable a UK consumer to invest in cryptoassets will be in scope of the financial promotion regime.
• In terms of territorial scope, the FCA reiterates that financial promotions that are capable of having effect in the UK are caught (regardless of who the promotion is primarily aimed at) and this will be a challenge for cryptoasset firms that operate internationally. The FCA says that good practices that it has seen to control this risk include geo-blocking or other location-based controls to prevent UK customers from purchasing products.
• Firms that offer their customers the opportunity to buy/sell crypto with a third-party MLR-registered firm will still need to consider whether they can themselves communicate financial promotions to their customers.
• The exemption for “image advertising”, which may be relevant in the context of sponsorship deals such as with UK football clubs involving the promotion of a crypto firm’s name/logo, is very narrow in terms of the information which can be included in any promotions.
• Some firms have paused promoting via social media or using influencers until they are confident they can comply with the new rules.
• The FCA’s fair, clear and not misleading expectations are more exacting than the existing ASA standards.
• Risk summaries should be tailored to the specific crypto products offered.
• The FCA observed that firms are at different stages of preparation for introducing appropriateness assessments, intended to assess whether customers have sufficient knowledge and experience to purchase cryptoassets. The FCA indicates that the least-prepared firms were planning to implement only a single appropriateness assessment across the range of cryptoassets they offer.
• The FCA warns that firms should avoid pressuring investors into “professional client” status to avoid the rules applying to promotions to retail clients.

Threat: FCA disappointed by lack of engagement from overseas firms

In a press release the FCA says it is concerned by the failure of many overseas and unregulated crypto firms to engage with it on the new rules. The FCA promises to act against firms illegally marketing to UK customers from 8 October.