FCA financial promotion restrictions will apply to cryptoassets
09 August 2022
09 August 2022
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.
RISK CLASSIFICATION |
FIN PROM RESTRICTIONS (I.E. MARKETING) |
DOFP RESTRICTIONS (I.E. ACCESS TO THE INVESTMENT) |
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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 |
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 |
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 |
Same position as RMMIs, with an additional preliminary suitability assessment requirement |
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.
DON'T INVEST UNLESS YOU'RE PREPARED TO LOSE ALL THE MONEY YOU INVEST. THIS IS A HIGH-RISK INVESTMENT AND YOU ARE UNLIKELY TO BE PROTECTED IF SOMETHING GOES WRONG. [ADDITIONAL WORDING FOR DIGITAL MEDIUMS: TAKE 2MINS TO LEARN MORE.] |
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(iii) Positive frictions – personalised risk warnings and 24 hour cooling off: Firms can begin onboarding the above described permitted retail investors but must:
[CLIENT NAME], THIS IS A HIGH-RISK INVESTMENT. HOW WOULD YOU FEEL IF YOU LOST THE MONEY YOU'RE ABOUT TO INVEST? [ADDITIONAL WORDING FOR DIGITAL MEDIUMS: TAKE 2MINS TO LEARN MORE.] |
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(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).
(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 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.
The new rules apply to authorised firms 'approving' financial promotions of others ("s21 approvers").
The key things you need to know are:
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:
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.