The exemption in the FPO (article 73ZA) provides that cryptoasset businesses registered with the FCA under the MLRs can (i) communicate their own cryptoasset financial promotions; and (ii) have cryptoasset financial promotions communicated on their behalf, without breaching the financial promotion restriction. MLR registered persons should have regard to the relevant financial promotion rules when communicating financial promotions or preparing communications to be made on their behalf.

The rules to which the FCA’s Guidance relates include:

i. Principle 7 (Communications with clients) of the Principles for Businesses (Principles) that applies to: (i) authorised persons communicating financial promotions or approving financial promotions for communication to professional investors; and (ii) MLR registered persons.

ii. Principle 12 and PRIN 2A that apply to authorised persons communicating or approving financial promotions addressed to, or likely to be received by, retail customers.

iii. Relevant parts of GEN (statements about authorisation and regulation by the appropriate regulator, use of FCA logo).

iv. Conduct of Business Sourcebook (COBS), chapter 4 (Communicating with clients, including about financial promotions).

v. COBS 10 (Assessing appropriateness).

These rules are all underpinned by the core requirement that financial promotions must be fair, clear and not misleading (COBS 4.2.1 R, Principle 7, PRIN 2A.5.3 R).

Authorised persons communicating or approving financial promotions must also consider their obligations under the Consumer Duty. The Consumer Duty does not apply to unauthorised MLR-registered firms communicating their own promotions. The Guidance sets out various steps which might be taken to meet the Consumer Duty obligations (discussed below).

Fair, clear and not misleading requirement

The Guidance emphasises the need for financial promotions to be fair, clear and not misleading, in accordance with the FCA’s Principles and Conduct of Business Sourcebook (COBS). Firms are expected to take particular care when communicating or approving cryptoasset financial promotions, given their relevantly recent emergence as an asset class and the new risks likely to emerge with them.

In developing and reviewing cryptoasset financial promotions, firms should undertake thorough due diligence on the cryptoasset being promoted and ensure that promotions are presented in such a way that consumers are equipped take clear, considered, and informed decisions as to whether investing in the cryptoasset is right for them. This includes considering the means of communication, the information that is intended to be conveyed, and the type of consumer intended or expected to receive the information before making financial promotions.

The Guidance directs firms to consider the FCA’s existing guidance in COBS 4 when assessing whether a financial promotion is fair, clear and not misleading, and provides a non-exhaustive list of factors that might be taken into consideration which include:

i. Clarity and comprehension of the communication

ii. Consumers’ understanding of risks

iii. Providing a balanced view of information

iv. Avoiding exaggerated claims

v. Avoiding omitting relevant information

vi. Accuracy of information

vii. Reliability of past performance when predicting future performance

viii. Disclosing costs, fees, and charges

ix. Implementing effective systems and controls to monitor the compliance of their promotions

The FCA acknowledges that promotions of complex investments might require a higher volume of supporting information or disclosure, and such firms may include well-signposted, supporting hyperlinks or separate pathways for consumers to access the information to make informed decisions. Including information on key risks in the later stages of the financial promotion consumer journey would not be sufficient to comply.

Consumer Duty – application to cryptoasset financial promotions

The Consumer Duty imposes standards of consumer service across retail financial services markets. It came into force on 31 July 2023, and introduced:

i. A new Consumer Principle (Principle 12) for firms to act to deliver good outcomes for retail customers

ii. Cross-cutting rules, including obligations to act in good faith towards retail customers, avoid calling foreseeable harm, and supporting them in their financial objectives

iii. A suite of rules under the four outcomes: (i) products and services, (ii) price and value, (iii) consumer understanding, and (iv) consumer support

In the context of cryptoasset financial promotions, the Consumer Duty builds on the core requirement that financial promotions are fair, clear and not misleading. The FCA emphasises that the Duty builds on, and goes further than, the existing disclosure rules (for example, those in COBS 4).

While recognising that firms cannot entirely protect customers from the risk of loss associated with cryptoassets, the Guidance highlights that firms have a duty to ensure consumers have the information necessary to fully understand and accept those risks. Authorised persons should support customers’ understanding by ensuring that financial promotions:

i. Meet the information needs of customers.

ii. Are likely to be understood by customers intended to receive them.

iii. Equip customers to make decisions that are effective, timely, and properly informed.

iv. Are tailored to the characteristics of the customers intended to receive the financial promotion, having regard to any characteristics of vulnerability, the complexity of the relevant products, the communication channel to be used, and the role of the firm in communicating or approving the promotion.

The FCA also emphasises that authorised firms should consider the overall product or service and what the relevant target customers can reasonably be expected to understand, taking into account the complexity of the promoted cryptoasset. Financial promotions for complex yield cryptoasset models or arrangements, for example, might require particular care and disclosure of specific risks, as discussed below.

Due diligence

The Guidance sets out the expectation that firms will conduct sufficient due diligence before communicating or approving cryptoasset financial promotions. Due diligence is necessary for three primary reasons: (i) to understand and disclose the relevant risks of the cryptoasset (ii) to verify any claims made in the promotion, and (iii) for firms subject to the Consumer Duty, to ensure the promotion is consistent with the obligation to act to deliver good outcomes and does not cause foreseeable harm to retail customers.

The FCA does not prescribe a specific level or frequency of due diligence but expects firms to use all sources available to them, including publicly available information, information from issuers, and independent professional advisers, where appropriate.

Dependant on the type, content, and recipients of the promotion, and the nature of the cryptoasset, firms may need to consider different aspects of due diligence, such as:

i. The authenticity and accuracy of the proposition in the promotion, which may involve checking the background of the issuer, developers, or other key individuals, and reviewing the white paper and other documentation associated with the cryptoasset.

ii. The steps necessary to ensure that the cryptoasset is not linked to fraudulent activity, scams, money laundering, or other financial crime, which may require obtaining and verifying information from the issuer or other sources, and complying with the Money Laundering Regulations.

iii. The operational or technological risks associated with the cryptoasset, such as risks related to the blockchain it uses, its vulnerability to hacks or code exploits, and its environmental, social, and governance impacts.

iv. The legal and compliance implications of the cryptoasset, such as whether it constitutes a specified investment or a regulated activity under the Financial Services and Markets Act 2000 (FSMA), whether it falls within the scope of the financial promotion regime, and whether it is subject to any other regulations or restrictions in the UK or other jurisdictions.

The Guidance warns that if a firm fails to conduct adequate due diligence, this may constitute a breach of the requirement for promotions to be fair, clear - and not misleading, and may also breach the general prohibition or the financial promotion restriction under FSMA, which are criminal offences. The FCA also reminds firms of their existing obligations under the Money Laundering Regulations to take necessary steps to prevent facilitating money laundering or other financial crime.

Disclosure requirements

The Guidance states that firms should clearly disclose the legal and beneficial ownership of the cryptoasset before and during the agreement, especially where the ownership may change under certain complex yield models or arrangements. Firms should clearly and prominently disclose who owns the legal and beneficial rights to the cryptoasset as part of the financial promotion and assess whether consumers understand their ownership rights and the associated risks as part of the appropriateness assessment.

Firms should also disclose the terms of redemption, the risk of insolvency of the issuer or custodian, and any other dependencies that may affect the value or volatility of the underlying asset. For cryptoassets that offer complex yield models or arrangements – such as staking, borrowing, or lending – firms should provide clear evidence of how the advertised rates of return could be achieved, based on reasonable assumptions and objective data, and disclose any fees, commissions, or charges that could affect the return. Firms should also consider whether these cryptoassets or arrangements may constitute or involve a collective investment scheme or another specified investment that requires authorisation or reliance on an exemption under FSMA.

Furthermore, the Guidance reminds firms not to give an inaccurate or misleading impression of their regulated status or the regulated status of the cryptoasset or service being promoted. Firms should not suggest or imply that they are authorised by the FCA or that their status is equivalent to being authorised, or that the cryptoasset or service is regulated by the FCA, unless this is the case. Firms should also ensure that they are not using their regulated status in a promotional way, or implying that the FCA approves of or endorses their affairs or any aspect of them.

Financial promotions on social media

Financial promotions communicated on social media platforms are a particular area of concern for the FCA, given the potentially broad reach of such communications. The Guidance directs firms to consider the FCA’s existing guidance on social media and customer communications (FG15/4), as well as the updated guidance on which the FCA has consulted (GC23/2).

Financial promotions on social media are subject to the same rules as other forms of communication, regardless of the format or type of communication. Those making promotions on social media platforms will need to consider the means of communication, the information being conveyed, and the type of consumer expected to receive the information in the same way as those promoting via other platforms. They should ensure they disclose any relevant commercial relationships – for example, paid partnerships or commissions for promoting cryptoassets or cryptoasset services. Firms might also use social media to signpost potential customers towards other channels, such as the firm’s website, where they can find more comprehensive guidance.

Firms should also be aware of the territorial scope of the financial promotion regime, which applies to any communication that is capable of having an effect in the UK, regardless of where it originates or who communicates it. This could be particularly relevant when promoting on global social media platforms. Firms should take reasonable steps to prevent their financial promotions from being seen by UK consumers if they are not intended or authorised for them, such as by using geo-blocking or location-based controls.

Financial promotions for cryptoassets that claim a form of stability or that claim their value is linked to a fiat currency

Some cryptoassets have complex features and risks that can be difficult for customers to understand, and therefore require firms to take greater care when communicating or approving financial promotions relating to such cryptoassets. For example, in the FCA’s view, cryptoassets that claim a form of stability, or that claim their value is linked to a fiat currency (commonly known as ‘stablecoins’) carry additional risk.

The Guidance sets out the following expectations for firms to help ensure promotions of these cryptoassets are fair, clear and not misleading:

i. Firms should conduct due diligence on claims about stability or links to a fiat currency and should be able to demonstrate that such claims are bona fide – for example, by providing details of how the form of stability is maintained and any assets used to maintain the stability.

ii. Firms should consider the potential harm to consumers and be confident that any claims regarding stability are genuine and can be substantiated. Firms should not use terms that could mislead consumers such as ‘inflation-resistant’.

iii. Where the relevant cryptoasset primarily relies on an algorithm or holdings of other cryptoassets to make such claims, the FCA would likely consider a financial promotion making claims of stability to be in breach of the requirements in COBS 4.2 and, where applicable, the Consumer Duty. The FCA would also consider claims that these cryptoassets can be a ‘store of value' to be in breach of the requirements in COBS 4.2 and, where applicable, Principle 7 and PRIN 2A.5.3 R, where such claims primarily rely on an algorithm or a reserve of other cryptoassets.

As part of the wider consumer journey requirements outlined in the FCA’s Policy Statement (PS23/6) (see our 27 June 2023 client alert on this topic), firms should disclose risks specific to cryptoassets that claim a form of stability in the risk summary. Firms should also robustly assess consumers’ understanding of these risks as part of the appropriateness assessment as part of the consumer journey requirements. The assessment should be designed to test whether the consumer has sufficient knowledge and experience of the specific type of service or cryptoassets being promoted.

Financial promotions for cryptoassets that claim to be backed by a commodity or an asset

In order to obtain sufficient evidence to ensure that any claim of commodity or asset backing is fair, clear and not misleading, the Guidance states that firms should conduct appropriate due diligence on the claims related to commodity- or asset-backing to ensure that they are accurate, up-to-date, and substantiated. This may include undertaking background checks on the issuer, reviewing the white paper and other documentation associated with the cryptoasset, and verifying the proof of ownership and custody of the underlying commodity or asset.

Firms should also consider whether the cryptoasset constitutes or involves a specified investment – such as a derivative or a unit in a collective investment scheme – and where it does, confirm that they have the required authorisation and appropriate permissions to conduct their business in the UK.

The Guidance also states that a financial promotion relating to a cryptoasset that claims to be backed by a commodity or asset would be unlikely to be considered fair, clear and not misleading, unless it sets out with sufficient clarity and prominence the following information:

i. Proof of ownership of the underlying commodity or asset, such as through disclosures, independent audits, or proof of deposits. Firms should make evidence of the underlying commodity or asset available to potential consumers, such as through the consumer journey, before they make an investment

ii. Evidence of any custodian responsible for the underlying asset and details of the underlying custody agreement, including where the commodity or asset is held. In particular, it should be clear to consumers ‘who’ the custodian is, what its relationship with the issuer is, and what services they are providing. When approving or communicating a financial promotion, firms should consider whether the custodian has relevant permissions to provide custody services in the relevant jurisdiction

iii. Clear terms of redemption for consumers, including the timescales for redemption, fees, proof of ownership requirements of the cryptoasset redeemed, and an account of what asset is being returned to the consumer. Firms should make information on redemption available to potential consumers throughout the consumer journey, including before consumers make an investment

iv. The risk that the consumer will lose some or all of their money if the issuer or custodian(s) becomes insolvent

v. Any further reasonably foreseeable dependencies that may significantly affect the value or volatility of the underlying asset

As described above in relation to financial promotions for cryptoassets that claim a form of stability, firms should disclose risks specific to this type of cryptoasset in the risk summary and assess consumers against their understanding of these risks as part of the appropriateness assessment.

Recommended next steps

The FCA emphasises that the Guidance is not exhaustive and does not provide a complete description of the steps that firms should take when communicating or approving cryptoasset financial promotions. The FCA will keep the Guidance under review and consider if changes are needed in light of market or regulatory developments.

Firms that are involved in the communication or approval of financial promotions relating to qualifying cryptoassets might consider taking the following next steps:

i. Review the Guidance and the feedback statement to understand the FCA’s expectations and rationale for the Guidance;

ii. Assess the compliance of their existing and planned financial promotions with the guidance and the relevant rules, and make any necessary amendments or withdrawals;

iii. Ensure they have effective systems and controls to monitor and update their financial promotions in light of market developments or other events that could affect the fairness of claims made;

iv. Conduct appropriate due diligence on the cryptoassets and claims they promote or approve and ensure they are able to demonstrate and substantiate them with evidence;

v. Consider the information needs and characteristics of the consumers to whom they direct or who are likely to receive their financial promotions, and tailor their communications accordingly;

vi. Seek independent legal advice on the regulatory characterisation of their cryptoasset activities and investments and whether they require authorisation or exemption under FSMA.

In-depth 2023-257