On June 7, 2023, the UK Parliament passed the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, bringing cryptoassets under the rules governing the marketing of financial products in the UK. The statutory instrument amends the Financial Services and Markets Act (Financial Promotion) Order 2005 (FPO) and extends it to crypto-assets effective October 8, 2023. The FPO defines the investments and activities covered by the financial promotion regime, as well as the associated exemptions.
On June 8, 2023, the Financial Conduct Authority (FCA) published a policy statement outlining the final rules for crypto asset promotions (PS 23/6). The formal inclusion of crypto-assets in the financial promotions regime comes against the backdrop of the UK Government’s strategy to ensure the UK becomes a hub for crypto-assets, while balancing that goal with adequate consumer protections .
The limitation for financial promotions
Section 21 of the Financial Services and Markets Act 2000 (FSMA) sets out the restrictions on making “financial promotions” (Financial Promotions Restriction) in the UK. Broadly speaking, this restricts companies from conducting marketing and communications related to investing activities unless:
- the company in question is authorized by the FCA (an authorized person);
- the relevant communication has been authorized by an authorized person; or
- the relevant marketing or communication activity falls under an exemption from the FPO.
A “financial promotion” is any invitation or inducement to participate in investment activities, including trading in, arranging deals in, or advising on deals related to certain investments (including crypto-assets). Promotions on websites, apps, social media and online advertisements are eligible, as are posters and advertisements in public transport. Financial promotions must be “stand-alone compliant”, meaning that every stage of a communication is subject to the rules.
This is especially important when ads include hyperlinks and separate paths to more information about cryptoassets.
Changes to the Financial Promotions Order to include crypto-assets
Under PS 23/6, a “qualifying crypto asset” is now included as a type of investment subject to the FPO.
A “cryptoasset” is defined as:
any cryptographically secure digital representation of value or contractual rights that (a) can be transferred, stored, or traded electronically, and (b) uses technology that supports the recording or storage of data (which may include distributed ledger technology).
A “qualifying crypto asset” is one that is fungible and transferable. To the exclusion of electronic money and certain crypto-assets that may only be used in a limited way,1 like NFTs, NFTs can be a qualifying cryptocurrency if (i) they have features such as fractionation that make them fungible or (ii) they are otherwise considered a type of financial product subject to the FPO.
Importantly, the FPO’s amendments provide additional ways for companies to comply with the restriction on financial promotions, for example by allowing crypto asset companies that are not authorized in the UK, but are only registered with the FCA for anti-money laundering purposes.2 to issue financial promotions or approve financial promotions made by other unauthorized or unregistered crypto asset companies. Without this dispensation, FCA-registered companies would have to obtain approval or approval for their financial promotions from an authorized person.
In practice, this new rule may not make much of a difference, as crypto asset companies do not normally require FCA authorization, and existing FCA authorized companies may be reluctant to approve the financial promotions of other crypto asset companies as they a degree of responsibility for the content of such promotions.
In addition, obstacles are likely to remain as many crypto asset companies are currently failing their applications for FCA registration. Currently, there is not a significant number of FCA registered crypto asset companies, and even fewer willing to endorse other companies’ financial promotions.
If companies that fall within the scope of the financial promotions restriction cannot obtain FCA registration or have their promotions approved, they must restrict their promotions by not running them in the UK or by ensuring that promotions are only go to recipients who fall within exemptions. The FPO includes a number of exemptions typically used by unauthorized companies (including non-UK companies looking to market to UK customers), which can be useful for crypto companies. These exemptions cover financial promotions related to:
- Financial Institutions (Article 19 FPO).
- Entities above certain size thresholds (Article 49 FPO).
- Certain high net worth individuals (Article 48 FPO).
- Certain experienced investors (Sections 50, 50A FPO).
Almost final FCA rules for financial promotions
Following a consultation with the FCA in January 2022, the FCA has simplified its financial promotions rules by dividing the rules into three product categories:
- Readily Realizable Securities, which are not subject to marketing restrictions.
- Restricted Mass Market Investments (RMMIs), which are subject to certain restrictions.
- Non-mass market investments, which may not be sold to retail investors.
The FCA’s policy statement classifies cryptoassets as RMMIs. This means that financial promotions must comply with a number of rules set out in the FCA handbook, in addition to the overarching requirement that the promotions must be fair, clear and not misleading. The requirements include the following:
- Promotions must include a risk warning and associated risk overview.
- Monetary and non-monetary incentives to invest are prohibited.
- Guideline Offer financial promotions3 (DOFPs) including consumer travel protection are subject to additional rules.
- New investors are given a cooling-off period of 24 hours.
- Customer categorization.
- Suitability assessments must be conducted before a client is shown DOFPs, i.e, the knowledge and experience of the recipient regarding the risks associated with the cryptoasset should be evaluated.
- Record keeping requirements must be met.
- Date and time stamp requirements for authorized companies approving financial promotions.
Next steps for businesses
The new rules will go into effect on October 8, 2023. Companies operating in the crypto asset space and currently seeking FCA registration should be mindful of compliance with the new financial promotions restriction. Unauthorized companies, including those based outside the UK, will need to consider their marketing efforts in the UK in relation to crypto-assets and how to comply with the restriction on financial promotions. In addition, the FCA is consulting the industry to develop further guidance on how companies can meet the general requirement that financial promotions for crypto-assets must be fair, clear and not misleading.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.