This week, the government published the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (Order) along with an explanatory memorandum. This is the latest in a raft of measures enhancing the UK's oversight of cryptoasset activities, raising consumer protection standards while providing greater certainty for business. The Order follows the government's previous consultation back in July 2020 and later responses in January 2022 .
The Order proposes some key regulatory changes to the marketing by cryptoasset issuers and service providers in the UK, which has generally not been subject to formal regulatory oversight until now – only the Advertising Standards Authority has had oversight for items not falling in the traditional financial services regime.
Key changes include:
- Application of marketing (financial promotion) rules to cryptoassets (e.g. Bitcoin and Ether but not NFTs); and
- Business with MLR registration for crypto can avail themselves of an exemption for their own marketing and for onward marketing by third parties. This will be subject to conduct rules to be set by the FCA, including a requirement that promotions be "fair, clear and not misleading".
Once implemented, the new rules will have an impact on all unregulated crypto businesses whether UK or non-UK based, though UK businesses with MLR registration can rely on the exemption noted above. This will mean that they will either need to seek to be licenced in the UK (which will be required in any event once the new UK cryptoassets licensing regime comes in); or they will need to rely on approval of their marketing communications by a regulated firm (but the new "section 21 gateway" (see below) will make this more challenging for regulated firms).
Crypto businesses which are authorised institutions in the UK, will not need an additional licence as a result of these new rules, however, they will need to fold in marketing communications in respect of their crypto business within their financial promotions compliance framework.
The Order aims to ensure that cryptoasset promotions are held to the same standards as those for wider financial services products as part of a package of forthcoming changes to align regulation of cryptoassets and cryptoasset services more closely with the financial services regime. The FCA has said that it plans to expand its recent changes to higher-risk financial promotions to crypto financial promotions when the Order takes effect.
A bit more detail
(1) Expanding the scope of financial promotion restrictions
Currently, the majority of cryptoassets sit outside of the financial promotion regime. However, the Order proposes to change this in response to a growing number of scams and misleading adverts, as well as research indicating that UK retail investors are buying cryptoassets whose risk profiles may not be appropriate for their ability to absorb losses. The FCA had earlier imposed a ban, which will remain in place, on firms under its supervision marketing derivatives and certain debt securities referencing cryptoassets to retail investors, while the Advertising Standards Agency has been monitoring and taking action in relation to certain crypto marketing activity.
The Order expands the scope of the financial promotion restriction under Section 21 of the Financial Services and Markets Act 2000 (FSMA) by amending the Financial Promotions Order 2005 (FPO) to include financial promotions relating to "qualifying cryptoassets" – which includes exchange tokens, such as Bitcoin, and other tokens whose marketing is not currently regulated.
To bring cryptoasset promotions in scope, the Order will amend the FPO by making "qualifying cryptoassets" a new category of controlled investment and amend certain existing controlled activities – namely dealing, arranging, advising and managing – to include reference to qualifying cryptoassets. Interestingly, the controlled activity of "safeguarding and administering investments" is not proposed to be expanded to cover custody of qualifying cryptoassets – this would mean that marketing of custodial wallet services will not be regulated in the first instance (although the services themselves remain covered by the FCA registration requirement under money laundering rules if carried out from the UK).
The effect of the planned approach would be for the FCA to become the regulator and supervisor of qualifying cryptoasset promotions, applying conduct rules to firms making and approving non-exempt promotions.
(2) Exemptions to the financial promotion restrictions
As it stands, there are currently three routes to legally communicate a financial promotion: (i) the promotion is communicated by an authorised person (that is, a person authorised by the FCA or PRA); (ii) the content of the promotion is approved by an authorised person; or (iii) the promotion falls within an exemption in the FPO.
The Order introduces a new exemption in the FPO relating to qualifying cryptoassets. This exemption has two limbs: firstly, it allows cryptoasset businesses on the FCA's anti-money laundering register (i.e. with an MLR registration), and who are not authorised persons, to communicate their own financial promotions. And secondly, it allows those cryptoasset businesses to place cryptoasset promotions for onward communication by third parties (e.g. advertising platforms). The registered person will, however, remain responsible for the way in which the promotion is communicated. The exemption therefore provides a useful route to legal communications for registers persons who are not themselves authorised.
Unsurprisingly, and in contrast with the current position for FSMA-authorised firms, registered cryptoasset businesses relying on this exemption will not be able to approve financial promotions or communicate their own financial promotions for other controlled investments. However, FSMA-authorised firms' ability to approve third-party promotions is also set to be narrowed once the Financial Services Markets Bill (FSM Bill) passes and introduces the "section 21 gateway".
The government has described the exemption as temporary – with the intention to review the approach to the exemption alongside future regulatory approaches to cryptoassets. The exemption may come as a surprise to some, since the exemption was not part of the government's original consultation. However, according to the government, the exemption was not consulted on because a consultation would have significantly set back the timeline for implementing the Order – with the government considering a speedier implementation necessary to counteract the growing risks to consumers.
(3) Next steps and implementation
The implementation of the Order requires approval by both chambers of Parliament, as secondary legislation requires parliamentary approval to change to controlled activities and controlled investments. The FSM Bill also includes a clarificatory amendment to show that the types of assets to which the financial promotion restriction applies may include cryptoassets.
Once approved, the Order has a four-month implementation period to allow the industry time to understand and implement the changes. The FCA has previously indicated that the updated high-risk investment financial promotion rules will apply to crypto from the same date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.