The Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (the “FPO”) was updated on 8 October 2023 to regulate the marketing of cryptoassets to UK-based consumers.
The Financial Conduct Authority (“FCA”) has provided further guidance in its Policy Statement PS23/6 (the “Rules”) and has recently published a finalised non-handbook guidance document FG23/3 (the “Guidance”) with the aim of reducing harm to consumers.
The new regime
The FPO now governs the communication of financial promotions in relation to “qualifying cryptoassets”. These are defined as assets which are fungible and transferable. Electronic money, fiat currency (even where issued digitally) and specific assets indicated by the FPO are excluded.
“Financial promotion”, instead, has a broad and “technologically neutral” definition. This includes conducts like inviting and inducing to engage in investment activity and it covers online promotions such as websites, mobile apps and social media as well as offline promotions print or telephone.
The FPO, Rules and Guidance apply to all firms, whether in the UK or overseas, which market qualifying cryptoassets in the UK. They also apply where a promotion is not solely targeted at UK consumers.
The four routes
A firm must follow one of four routes to legally promote qualifying cryptoassets:
- the promotion is communicated by an FCA authorised person;
- the promotion is made by an unauthorised person but approved by an FCA authorised person;
- the promotion is communicated by (or on behalf of) a cryptoassets business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; or
- the promotion otherwise complies with an exemption in the FPO.
Financial promotions of qualifying cryptoassets must comply with rules including that:
- authorised persons must not approve a promotion unless they have the appropriate competence and expertise to do so;
- all financial promotions must be clear, fair and not misleading and investors must fully understand the risks involved with cryptoasset investing;
- customers should receive both general and personalised warnings (including the customer’s name) on the risks of investing in cryptoassets. This should also include the risk that customers could lose all of the money that they invest in cryptoassets;
- unregistered firms may continue communicating with UK customers regarding withdrawals, transfers and the sale of existing cryptoassets. However, firms have a duty to provide existing consumers with complete information and must not promote further investment activities, unless approved by an authorised person;
- a 24-hour cooling-off period applies to first-time investors; and
- incentives to invest in cryptoassets (e.g. “refer a friend” schemes) are almost entirely banned.
Risk of non-compliance
The FCA will take action against the unlawful marketing of cryptoassets. Non-compliant firms risk being put on a warning list and having their websites, social media accounts, apps and other platforms blocked. They further risk violating the financial promotion restriction under the Financial Services and Markets Act 2000 (“FSMA”) and may face up to 2 years imprisonment, an unlimited fine, or both.
In case an unlawful promotion leads to a UK consumer entering into an agreement, that agreement may be unenforceable. A consumer would be entitled to claim any money or other property that they have paid or transferred under that agreement and compensation for losses that directly arise from that.
Finally, proceeds of unlawful promotions may also be deemed to be proceeds of crime and firms could also be found to commit other offences such as money laundering.
The UK’s rules around cryptoassets are constantly changing. Cryptoassets firms should urgently review their processes and marketing strategies to ensure that they comply with the latest rules or risk financial penalties and criminal sanctions.