In a bold move set to shake up the world of cryptoassets, the UK Government is introducing a robust new financial promotions regime that will regulate how crypto asset firms, both homegrown and overseas, market to UK consumers.
This seismic shift is fuelled by the UK Government's determination to protect consumers, ensure transparency, and prevent the misuse of financial systems for illicit activities such as money laundering. Now, more than ever, cryptoasset firms need to up their compliance game or face severe penalties, including the prospect of up to 2 years imprisonment.
Under this new regime, to be legally compliant, cryptoasset promotions must follow one of four paths, which include being communicated by an FCA authorised person or a cryptoasset business registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). This development brings cryptoasset activities firmly under the umbrella of traditional financial regulatory structures, including elements such as Know Your Customer (KYC), Anti-Money Laundering (AML), and client due diligence. If you're a player in the cryptoasset arena, it's time to take note, prepare, and adapt to these sweeping changes. The future of cryptoasset promotion in the UK is here, and it's regulated.
Understand the new FCA Financial Promotions Regime in 5 minutes.
- Introduction of New Financial Promotions Regime in the UK for Cryptoassets: The UK Government has announced its intention to regulate promotions of certain crypto assets. This move is part of a broader effort to bring these promotions within the remit of the Financial Conduct Authority (FCA). This new regime will apply to all firms marketing crypto assets to UK consumers, regardless of whether the firm is based in the UK or overseas.
- Definition and Consequences of Financial Promotion: In this context, a financial promotion is any invitation or inducement to engage in investment activity related to crypto. This can include a broad range of communications like website content, mobile apps, social media posts, and online advertising. Firms that do not follow the new rules could face criminal charges, including up to 2 years imprisonment and/or a fine.
- Four Legal Routes for Crypto Asset Promotions: Once the new regime comes into effect, firms can only communicate cryptoasset promotions to UK consumers through one of four specified routes: by an FCA authorised person; by an unauthorised person but approved by an FCA authorised person; by a cryptoasset business registered under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) with the FCA; or if the promotion complies with the conditions of an exemption in the Financial Promotion Order (FPO).
- Potential Requirements for Crypto Asset Promotions: The FCA plans to require firms to use specific risk warnings and "positive frictions" (like a 24-hour cooling-off period) in their consumer journeys. The goal is to ensure that promotions are clear, fair, and not misleading. These measures are likely to be similar to those in place for other high-risk investments as of 1 February 2023.
- Implementation Period and Re-application for Registration: The UK Government plans to offer a four-month implementation period for the new regime. Also, any firm whose previous application for registration under the MLRs was unsuccessful is reminded to address all of the FCA's concerns before reapplying.
FCA Promotions Regime Questions
What is the scope of the new regime?
The regime will apply to all firms marketing crypto assets to UK consumers, regardless of whether the firm is based overseas or the technology used to make the promotion**3**.
How will the Financial Promotions Framework affect iGaming & Gambling Companies?
iGaming and gambling companies that use crypto assets will also be impacted by these new regulations if they engage in financial promotions of these crypto assets to UK consumers. Here's how:
- Financial Promotions Regulation: These companies will need to ensure their financial promotions, which could include advertisements for their services or inducements to use their platforms, comply with the new rules. This could mean obtaining approval from an FCA-authorised person, becoming FCA-authorised themselves, or following one of the other legal routes outlined in the new regime.
- Consumer Protection Measures: iGaming and gambling companies will need to incorporate "positive frictions" such as risk warnings and cooling-off periods into their customer journey. These measures are designed to ensure that promotions are clear, fair, and not misleading.
- Potential for Penalties: If these companies fail to comply with the new regulations, they could face significant penalties including fines and potential imprisonment.
- Reputation and Trust: By complying with these regulations, iGaming and gambling companies can demonstrate to their customers that they operate within the law and prioritise consumer protection. This could enhance their reputation and build trust with their customers.
Who will need to comply with the new UK financial promotions regime?
All crypto asset firms marketing to UK consumers, including those based overseas, will need to comply with the new UK financial promotions regime. Firms must start preparing for this regime and the FCA will take robust action against firms breaching these requirements.
How can firms communicate crypto asset promotions to UK consumers under the new regime?
Once the regime comes into force, there will be 4 routes to communicate crypto asset promotions:
- The promotion is communicated by an FCA authorised person;
- The promotion is made by an unauthorised person but approved by an FCA authorised person;
- The promotion is communicated by a crypto asset business registered under the Money Laundering Regulations with the FCA;
- The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.
What are the penalties for not complying with the new regime?
Promotions that are not made using one of these routes will be in breach of the Financial Services and Markets Act 2000, which is a criminal offence punishable by up to 2 years imprisonment**5. The FCA will take robust action where they see firms promoting cryptoassets to UK consumers in breach of the requirements of the financial promotions regime. This may include take downs of websites that are in breach, issuing public warnings, and enforcement action6**.
What are the FCA's expectations for crypto asset businesses applying for Money Laundering registration?
Cryptoasset businesses must register with the FCA if they are carrying on certain cryptoasset activities. Cryptoasset businesses and any person who is an officer, manager, and beneficial owner in the business, will be subject to the fit and proper requirements under the MLRs. The FCA will take into account all relevant matters when assessing fitness and propriety, including the businesses' financial promotions.
How does the new FCA Promotion Framework relate to KYC, AML & the wider client due diligence picture.
The new financial promotions regime is part of a broader regulatory framework aimed at promoting transparency, preventing money laundering, and protecting consumers in the financial sector, including those involved with cryptoassets. While the document we analyzed doesn't directly mention Know Your Customer (KYC), Anti-Money Laundering (AML), or client due diligence, these concepts are closely related.
- KYC: Know Your Customer procedures are a critical component of financial regulations that aim to prevent identity theft, fraud, money laundering, and terrorist financing. Under the new regime, cryptoasset businesses will likely need to comply with KYC rules to ensure they know the identity of the customers they are dealing with.
- AML: Anti-Money Laundering regulations are designed to prevent the use of financial systems to launder money. As part of the new regime, cryptoasset firms registered under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) are one of the groups who can communicate cryptoasset promotions to UK consumers**1****2**.
- Client Due Diligence: This involves assessing the risk of a customer in terms of their potential involvement in money laundering or terrorist financing. The new regime, by including crypto asset firms registered under the MLRs, implies a requirement for such firms to conduct due diligence on their clients.
The FCA has stated that they will take into account all relevant matters when assessing fitness and propriety, including the businesses' financial promotions. This could potentially include a firm's adherence to KYC, AML, and client due diligence procedures.
What you need to know about the UKs FCA Financial Promotions Regime.
The forthcoming legislation that will bring cryptoasset promotions within the FCA's remit. This development means that firms, regardless of where they are based, will need to comply with the new UK financial promotions regime if they wish to market to UK consumers.
The regime will introduce four legal routes for promoting crypto assets, and non-compliance could result in severe penalties. It underscores the UK Government's ongoing efforts to increase oversight and regulation in the rapidly evolving crypto asset industry.