The FCA has published the findings of its review on the preparedness of cryptoasset services providers (CASPs) for the financial promotions regime, together with a letter addressed to firms intending to communicate/approve cryptoasset financial promotions ahead of the October 8, 2023 implementation date.
The FCA found that most firms have faced significant challenges preparing for the financial promotions regime, predominantly in relation to “back-end” processes (eg personalized risk warnings, 24-hour cooling off period, client categorization and appropriateness assessments). The FCA recognises these challenges and is therefore allowing MLR registered firms to apply for a modification by consent to the back end financial promotion rules in COBS 4.10.2AR, COBS 4.12A.15R, and COBS 10.1.2R. The modification gives MLR registered firms a three month delay to compliance, expiring on January 8, 2024.
Firms have also misunderstood the broad nature of the financial promotions definition, focussing their efforts on “traditional” advertizing without adequately considering how the regime applies to websites and apps. So here are 10 key things you need to know about.
1. Third party services
The FCA also called out firms that provide crypto services to other business, for example by allowing clients of a third party to buy or sell crypto. If the third party provides information to UK clients about the crypto service and enables those clients to trade crypto via the MLR-registered firm, the third party will likely communicate a financial promotion.
2. Brand advertizing
Brand advertizing (for example, sports sponsorships) are not financial promotions as we know (and the FCA agrees) but the regulator will be taking a closer look at these arrangements to ensure they are within the definition of an “image advert” and no wider. Firms should therefore carefully review sponsorship deals and brand advertizing arrangements.
3. Social media
The FCA expressed concerns about the use of social media and “finfluencers” but did not provide guidance for compliance. Social media contains specific challenges given its cross-border nature, and the difficulties with restricting who can see posts and how these can be shared.
4. Group entities
Another focus of the findings relates to group entities. The FCA urges firms to consider the scope of the Article 73ZA exemption in the Financial Promotions Order and explicitly identify the group entity responsible for promoting cryptoasset services to UK clients. For context, Article 73ZA allows a MLR-registered firm to communicate a financial promotion or for another party to communicate a financial promotion on that firm’s behalf, subject to the conditions of the exemption.
5. Territorial scope
The FCA discusses financial promotions in very broad terms, stating that financial promotions do not need to be specifically directed at UK clients to be capable of having an effect in the UK. Further, if a UK client can access and respond to the promotion, the geographic nexus will be met. We are not surprised by these statements, but in applying this approach, what “in the UK” means for cryptoasset promotions is arguably wider than for promotions relating to other financial instruments.
6. Risk summaries
Firms should consider whether it is practicable to use one risk summary to cover the full range of cryptoassets that they offer, or different risk summaries, if the cryptoassets they offer have different risks (for example, those that claim stability versus those with complex yield models).
7. Appropriateness assessments
Similar to risk summaries, firms should consider whether to have separate appropriate assessments for different cryptoassets types, or if implementing only one assessment to include sections specific to particular cryptoasset types.
8. Client categorization
The FCA expects that only a very limited number of retail clients will be able to meet the elected professional client status and states that it will “take robust action against firms that circumvent our rules, deliberately miscategorize clients”.
9. Implementation plans
The FCA expects firms to have clear implementation plans with key milestones for delivery. The plans should include how the firm will deal with:
- increased questions from clients regarding amended on-boarding processes;
- questions from existing clients who fail appropriateness tests or client categorization, but wish to continue trading crypto; and
- customer complaints.
10. Contingency plans
The FCA also expects firms to consider how they will:
- stop promoting cryptoassets if they cannot comply with the new regime; and
- withdraw or restrict access to crypto promotions (eg websites) that do not comply with the new regime.