Here are the specifics – FCA sets out the application of the Consumer Duty to regulated cryptoasset business

The FCA has confirmed that its Consumer Duty will apply to regulated cryptoasset business. In response to industry feedback, it has now published a consultation setting out its proposed specific guidance. 

The Duty – with its focus on outcomes – was designed to be future-proof, in the sense that its concepts would be sufficiently malleable to keep pace with developing markets and technology. The decision to provide bespoke guidance is nevertheless a welcome one. Firms operating within distribution chains that do not map directly onto the Duty have historically found it challenging to understand precisely how it applies to the specifics of their sector. Given the unique nature of many aspects of cryptoasset activity, the proposed guidance gives a clear insight into how the FCA intends the Duty to operate in this context.

The proposed guidance will not replace or substitute either the Consumer Duty rules in PRIN 2A or the existing non-Handbook guidance contained in FG 22/5. Rather, the proposed text should be understood as an amplification of the specific ways in which the Duty may apply in this context.

What does good look like?

The first challenge for in-scope firms will be identifying precisely what constitutes a good outcome. It is not possible to assess whether a firm is acting to deliver good outcomes in offering regulated cryptoassets without first articulating what that looks like for individual customers. Every aspect of compliance with the Duty requires a clear understanding of the benefits a product is intended to provide to retail customers.

Once ‘good’ has been identified, firms need to consider what the key drivers of harm might be. The FCA’s guidance provides insight into its specific areas of concern in the context of cryptoasset sales. These can be summarised as follows:

• atypical distribution chains;

• unpredictable markets;

• enhanced complexity of individual products; and

• the varying objectives, knowledge and experience of consumers.

Absent or out-of-scope manufacturers

Whilst cryptoasset issuers and trading platforms are examples of manufacturers from a Consumer Duty perspective, the FCA recognises that many regulated cryptoassets will either have no discernible manufacturer, or a manufacturer that falls outside the scope of the Duty. In such cases, in-scope distributors must take reasonable steps to assess the risk of a product and define a suitable target market, based on either information from the manufacturer, or publicly available material if that is all they can access. The same approach will apply to assessments of value; the FCA is clear that distributors cannot rely on the absence of a manufacturer, or the fact that the manufacturer is out-of-scope, as a basis for omitting a robust assessment of value.

The FCA expects distributor firms to exercise judgment regarding the information on which they base their assessments, noting that information from an overseas manufacturer in a jurisdiction in which cryptoassets are well-regulated may be afforded greater weight. Low-quality or absent information about the features of a cryptoasset and its intended benefit may indicate that it presents a greater risk of harm to consumers and potentially should not be distributed to them. Where there is a manufacturer gap, in-scope distributors will inevitably assume a greater burden for ensuring that cryptoassets are distributed in a manner that delivers good outcomes for retail customers.

Mitigating the risks of unpredictable markets

Firms will not be held responsible for poor outcomes occurring as a result of risks they reasonably believed customers understood and accepted. Sales processes should be designed to demonstrate a reasonable belief that consumers understood the relevant risks, taking into account the nature, design and communications about individual cryptoassets.

Firms also need to demonstrate that their systems prevent high-risk products from being targeted at vulnerable customers. The FCA has indicated that vulnerable customers are a ‘litmus test’ for whether firms are complying with the Duty. A thorough understanding of the customer base, including identifying vulnerabilities within it, is therefore essential.

Navigating the complexity of individual products 

Cryptoasset products are recognised as being more complex and niche than standard mass market retail products. Accordingly, they are likely to require a tighter and more defined target market if consumer harm is to be avoided. A target market of ‘all retail customers,’ without careful consideration of whether aspects of a product make it unsuitable for some, should be avoided. 

Distribution strategies must be appropriately calibrated to mitigate the risk of consumer harm. Firms should implement appropriate controls to prevent sophisticated products from reaching unsuitable retail customers, including warnings and a robust suitability assessment process. For example, leveraged products expose consumers to a greater risk of loss and should only be sold to those with demonstrable capacity to bear this.

Supporting consumers

Consumers purchasing cryptoassets are likely to have diverse, and potentially speculative objectives. Firms must ensure that they help customers make informed decisions that align with their goals and may need to provide additional support. This might include:

• illustrations of how products perform under stress;

• profit/cost calculators for staking and lending;

• loan-to-value calculators for borrowing product; or

• tracker dashboards displaying performance.

Crafting communications that support customer understanding will assume greater importance when marketing regulated cryptoassets. Firms must avoid over emphasising the advantages and downplaying the risks of crypto products. Key risks such as the unavailability of FSCS protection, potential losses and changes in fees or pricing must be prominently communicated in good time. Communications about custody should explain withdrawal timelines, wallet structures and the protection that comes from holding assets on trust. 

The FCA wants to see firms providing access to multiple, free support channels, manned by well-trained staff, with additional support available when there are incidents in the market or at key risk points, such as wallet freezes, staking failures or protocol upgrades.      The broader Consumer Duty principle of avoiding unnecessary friction and barriers to exit is particularly relevant to operations such as private key switching, or withdrawing to self-custody. 

Firms need to test, monitor and adapt communications and support offerings, paying close attention to complaints for evidence that customers are not receiving adequate information and/or support. Procedures for escalating key concerns, identifying fixes and then monitoring whether those fixes work need to be robust and well documented. Only then will firms have sufficient evidence to satisfy the FCA that all their interactions with customers mitigate the elevated risk of harm cryptoassets present.