Legal development

FCA financial promotion restrictions will apply to cryptoassets

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    On 1 August 2022, the FCA published its final rules restricting the promotion of high risk investments to mass retail clients, in Policy Statement 22/10 on "Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions" (PS22/10).

    The FCA has, for a long time, shouted its concerns about the mismatch between the rise in self-directed investors with vulnerable characteristics (e.g. over-confidence, making investments based on social and emotional factors, financial illiteracy) coupled with the rise in ownership of high-risk investments (e.g. cryptoassets) and high-speed mass-marketing (e.g. online platforms and social media) of those investments.

    In the FCA's view, when it comes to high risk investments, which includes qualifying cryptoassets, even good marketing (of which there are few) is not enough to protect consumers, and is definitely not enough to direct consumers to investments which meet their needs. Therefore, the FCA has introduced a new tripartite classification for high risk investments with various restrictions which also support the recently published Consumer Duty.

    (1) The new tripartite classification


    Readily realisable securities (RRS)

    Lowest risk

    Includes: listed or exchange traded securities, such as shares or bonds traded on the London Stock Exchange

    No restriction
    No restriction

    Restricted mass market investments (RMMI)

    Medium risk

    Includes: (1) Non-Readily Realisable Securities (NRRS), such as unlisted shares or bonds; (2) P2P agreements or portfolios; and (3) Qualifying Cryptoassets in future

    Mass marketing permitted with:

    • prescribed risk warning
    • risk summary

    RMMIs cannot be accessed by mass-retail investors, but can be accessed by certified HNW, certified sophisticated, self-certified sophisticated, or certified restricted investors with:

    • a personalised risk warning
    • 24 hour cooling off period
    • investor assessment and declaration forms
    • appropriateness testing

    Non-mass market investments (NMMI)

    Highest risk

    Includes: (1) Non-Mainstream Pooled Investments (NMPI), e.g. pooled investments in an unauthorised fund; and (2) Speculative Illiquid Securities (SIS), e.g. speculative mini-bonds

    Mass marketing not permitted but can be directed at retail investors who are certified HNW, certified sophisticated, self-certified sophisticated, or certified restricted with:

    • prescribed risk warning
    • risk summary

    Same position as RMMIs, with an additional preliminary suitability assessment requirement

    (2) The financial promotion restrictions in one place

    The restrictions detailed in PS22/10 will have the consequence of some investments – which will in future include "qualified cryptoassets" – no longer being able to be offered to mass retail investors, or will reduce the uptake from mass retail investors. 

    As such, the coming months is a good time for cryptoasset businesses to review the restrictions and compare it against future campaigns. The FCA has stated that the final rules for "qualified cryptoasset" when published, will be consistent with (i.e. near identical to) the rules for RMMIs (which qualified cryptoassets will be a subset of).

    The below list is a good place to start as any.

    (i) Restriction on incentives: Incentives (monetary and non-monetary benefits) cannot be provided to any category of retail investor, including HNW, sophisticated, and restricted investors, regardless of whether the client is new or existing. This includes refer a friend, and free shares /cryptoassets/cash, promotions.

    (ii) Prescribed risk warning and template risk summary: "Capital at risk" warnings are akin to "wallpaper" and no longer appropriate.

    • Firms must show new prescribed risk warnings (see below) in their financial promotions, which link to a standardised risk summary document. There are limited reasons to amend the prescribed risk warning, the FCA expects to obtain legal advice if they remove "and you are unlikely to be protected if something goes wrong".
    • Both must be must be prominent, legible, contained in its own border, with the right bold/underlined text. For digital mediums the risk warning must stay static at the top of the screen, even when the client scrolls up or down the page, and must be shown on every linked page; whereas the risk summary must be shown using a pop-up box or equivalent.
    • Link with Consumer Duty: The FCA encourages firms to monitor the effectiveness of their use of the risk warnings and risk summary document as part of their monitoring obligation under the Consumer Duty

    (iii) Positive frictions – personalised risk warnings and 24 hour cooling off: Firms can begin onboarding the above described permitted retail investors but must: 

    • show them a personalised risk warning that addresses them by name and which also links to a standardised risk summary document (see below). The personalised risk warning must be shown using a pop-up box or equivalent. The FCA expects that most firms will integrate the personalised risk warning into the on-boarding process. 
    • apply a minimum 24 hour cooling-off period where the investor cannot invest until they provide "active consent" that they will to proceed with the journey after the 24 hours. Firms may however start with other parts of the on-boarding process. 

    (iv) Client categorisation: Firms must utilise new investor declaration forms, and investors are required as part of the form to state why they meet the criteria of being certified HNW, certified sophisticated, self-certified sophisticated, and/or certified restricted (i.e. this is a new evidentiary requirement). Firms must also take reasonable steps to establish that the client meets the relevant criteria.

    (v) Appropriateness testing: Investors must pass appropriateness testing before they invest in RMMI or NMMIs, and firms do not have the option to allow clients to invest if they fail the test (unlike MiFID appropriateness assessments).

    • Investors cannot attempt the test more than twice within 24 hours to prevent them from "gaming" the test and being "coached". The questions asked shouldn't be binary yes/no and must be different on each re-take. Firms cannot tell investors the exact questions they got wrong, and cannot suggest, encourage or persuade investors to re-take the test. 
    • This appropriateness test, and the related guidelines do not apply to MiFID appropriateness assessments under COBS 10 and 10A.
    • Link with Consumer DutyFirms should consider whether they need to apply a longer lock out period than 24 hours in order to deliver good outcomes for consumers under the Consumer Duty. 

    (vi) Preliminary suitability assessments: Clients must undergo a preliminary suitability assessment before they can invest in NMMIs (this does not apply to RMMIs).

    (vii) Record keeping: Firms must record the metrics relating to client categorisation and appropriateness both in online and offline settings.
    • Firms must record the categorisation of each retail client; the number of retail clients categorised as HNW, sophisticated and restricted; and the evidence obtained in support of the categorisation / the reasons why the criteria is met.
    • Firms must record the total number of appropriateness tests taken, the total number of times the test was passed, the total number of times the test was failed, the final outcome of the appropriateness test for each retail client and the number of times the client was subject to the test for the same investment.
    • Link with Consumer Duty: Firms to consider whether it should record the metrics outlined in CP22/2 which the FCA decided not to introduce, particularly those related to whether consumers engage with protections in the financial promotions and onboarding journey and where consumers drop out of it, as part of the consumer understanding element of, and the monitoring obligations under, the Consumer Duty.

    Firms only have four months to implement the rules related to risk warnings for financial promotions (until 1 December 2022), and six months to implement all other rules (until 1 February 2023).

    For further detail each of the above restrictions, please keep reading.

    (3) Approving and communicating financial promotions

    The new rules apply to authorised firms 'approving' financial promotions of others ("s21 approvers").

    The key things you need to know are:

    • S21 approvers must self-assess and self-certify that they have the necessary competence and expertise in an investment product or service before approving the financial promotion. 
    • S21 approvers must ensure all financial promotions disclose: (a) the name of the approver; and (b) the date of approval approved. For digital mediums where space limitations are imposed by a third‑party marketing provider the required format is 'Approver FRN xxxxxx', (and the relevant FRN number must be inserted). This text must be 'clickable', and must open a page where the firm's full name and the date of approval is displayed.
    • S21 approvers must ensure approved promotions remain compliant for the life of the promotion. For high risk investments this includes compliance with the additional rules set out in PS22/10. 
    • S21 approvers must take reasonable steps to monitor the compliance of approved financial promotions. As well as obtain attestations of "no material change" from clients with approved promotions every 3 months, for the lifetime of the approved promotion.
    • S21 approvers must withdraw approval as soon as reasonable practicable when it becomes aware the approved promotion no longer complies with the relevant rules.
    • S21 approvers will must consider conflicts of interest when approving financial promotions.

    Related financial promotion and cryptoasset reforms

    PS22/10 follows the FCA's January 2022 consultation paper on the same (CP22/2) and a slew of assertive FCA and HMT publications aimed at tackling harm in the consumer investments market, over the last two years.

    PS22/10 and the new restrictions must therefore be read alongside these publications, including:

    • July 2022: the recently published Policy Statement 22/9 on "A new Consumer Duty" (see our briefing here)
    • January 2022: the FCA's Consultation Paper 22/2 on "Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions" (see our briefing here)
    • January 2022: HM Treasury's Consultation Response confirming it will bring "qualifying cryptoassets" within scope of the financial promotions regime (see our briefing here)
    • December 2021: HM Treasury's Consultation Paper proposing to revise the financial promotion exemptions and increase the thresholds for HNW, sophisticated, and self-certified sophisticated investors (see our briefing here).
    • June 2021: HM Treasury's Consultation Response confirming that authorised firms wishing to approve unauthorised firms (including cryptoasset providers) financial promotions will require FCA permission (see our briefing here)