Operating a successful Financial Promotion Approvals Process for Cryptoassets

March and April have been busy months in world of financial promotion compliance as HM Treasury published draft legislation – The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the Order). The FCA subsequently in early April issued a letter to overseas firms highlighting the Order and the importance of complying with the Financial Promotions Regime.

Our team compromises several subject matter experts in Financial Promotions who have worked across the full spectrum of financial services firms including those specialising in crypto services. In this short Blog, we share some hints and tips to help you operationalise a financial promotions approval process for cryptoassets.

The broader regulatory context

There is currently a legal framework in place for the approval of a financial promotion however the routes available for the approval of qualifying cryptoasset financial promotions once they fall within the regulatory perimeter would be limited. Simply put, to issue a promotion it must be communicated or approved by an authorised firm or rely on an exemption. This causes a problem for cryptoasset firms because firstly, they are not authorised persons under the Financial Services and Markets Act 2000 and secondly, there is a distinct lack of authorised firms who are willing and able to take on the approval of cryptoasset promotions.

The Order aims to fix this by introducing a new exemption to enable cryptoasset firms registered with the FCA under the UK Money Laundering Regulations (MLRs) to, in effect, approve their own cryptoasset advertising material.  

Some of the key issues

Many authorised firms, whether new or existing, still struggle to grasp some of the basic principles relating to financial promotions such as the requirement to be fair, clear and not misleading, and these are firms who are already operating in the FCA’s regulatory world. It is easy to see how cryptoasset firms with their technology focus will find it difficult to develop the right culture and strategy for the promotion of high risk assets to retail customers, and put in place an effective control framework, particularly in light of their preference for social media advertising.

Understanding the real nature and risks of these products will be a key factor in designing a compliant financial promotion. Whilst crypto asset firms will inherently have an in depth understanding of the product will they be able to translate this into the regulatory context? They will need to think about their advertising strategy through both the regulatory and customer lens. Incorporating and developing approaches to address the risks attached to the target market will be essential to ensuring compliance.

The FCA expects to apply a consistent approach to cryptoassets and treat them like any other high-risk investment. This includes using specific risk warnings, positive frictions (e.g. 24 hr cooling off period) in customer journeys and ensuing the overreaching requirement of making sure your promotions are clear, fair and not misleading. Crypto asset firms will need to make sure they have a detailed understanding of not only the specific rules but also the wider requirements and how the FCA approaches the regulatory of financial promotions.

Operating a Financial Promotions Approval Process

The statutory instrument giving effect to the changes is in Parliament. Once the legislation has been finalised we expect there to be a 4 month transitional period to help embed the new changes. So, it’s important to get prepared early and if you operate in this area start reviewing your crypto promotions against the proposed new standards so you don’t fall foul of the requirements. It’s also important to note that the proposed exemption is temporary and that the Government will reconsider this as part of its wider approach to the regulation of cryptoassets more generally.

We’re still waiting for the final rules from the regulator however they have already consulted and published a policy statement (PS 22/10) so we are fairly clear on their approach. COBS will contain  the rules related to these types of promotions. At a very high level there will be requirements relating to ensuring the promotion is fair, clear and not misleading across all channels including social media. The rules will also likely include requirements around the suitability of the delivery channel, the inclusion of prominent and appropriate capital at risk warnings and fee and charging information.  Most importantly the rules will likely require that the promotion provide a balanced impression and a fair indication of the risks. This is regardless of the delivery channel which will be more challenging for many cryptoasset firms as they tend to connect with their customers using technology such apps and websites and seek to create frictionless journeys.

Cryptoasset firms should ensure they have sufficient resources in their compliance teams to approve financial promotions. This is sufficient resource not just in terms of physical numbers but also staff competence. Your systems will need to include an audit trail for approvals and evidence those involved in marketing and distributing financial promotions for cryptoassets have been trained and understand the importance of the Financial Promotions Regime.

You want the best advice

There is now even greater value in firms being registered with the FCA under the MLRs for Cryptoasset Registration. We have unique insights into this process and are currently supporting a number of firms with their Cryptoasset Registration applications to maximise their chances of success – click here to find out more.

We are already advising clients across a number of sectors on how to ensure that their financial promotions meet the FCA Financial Promotions Regime both current and emerging. We recognise that in the crypto market, online and digital presence is fundamental to a crypto firms’ business strategy. Our experienced consultants have valuable insight into how to achieve compliance with these new rules in a manner that is proportionate and effective.

Our regulatory experience when it comes to cryptoasset compliance is second to none – whether it’s your AML obligations of financial promotions our experience and approach sets us apart. Get in touch to understand how and why.