Financial promotions gateway to pose problem for crypto firms

Incoming restrictions on financial promotions will curtail how cryptoasset firms advertise in the UK.

FCA consultation

The FCA has proposed rules under a new “gateway” for firms who approve financial promotions on behalf of unauthorised persons. The gateway will be introduced by the Financial Services and Markets Bill in 2023. The consultation paper sets out the FCA’s plans to operate this gateway which requires firms to apply for permission from the FCA if they wish to continue to approve financial promotions.

Implications for unregulated firms  

The introduction of the gateway will have a significant impact on how unregulated firms make "financial promotions". This is because they will need to find a firm who has been authorised via the gateway to approve financial promotions, unless they can bring their financial promotions within one of the exemptions set out in the Financial Promotions Order 2005 (the FPO).

This will particularly impact unregulated cryptoasset firms when the Treasury brings the promotions of “qualifying cryptoassets” into the financial promotions regime. The exact scope of the cryptoassets that will be covered by these changes has not yet been determined but the Treasury has confirmed it does not currently intend for cryptoassets to benefit from several of the FPO exemptions that would likely be most useful to firms facing a retail or mass market client base (e.g. the FPO exemption for certified high net worth individuals will not apply to cryptoassets). As many cryptoasset firms are not authorised by the FCA, it is likely that many of these firms (in particular those active outside the institutional space) will require their promotions to be approved by an appropriately authorised firm.

Due to the complex nature of many cryptoasset products and services, crypto firms may find it difficult to find authorised firms who not only have FCA permission to approve financial promotions but also have the appropriate expertise in relation to the underlying product to which the promotion relates. In its consultation paper, the FCA acknowledges that the number of authorised firms with the appropriate expertise to approve cryptoasset promotions may be limited at first.

As a result, unregulated cryptoasset firms that need their financial promotions to be approved should prepare themselves to be part of a large surge of crypto firms seeking approval of their financial promotions from a relatively limited pool of regulated approvers.

FCA consultation

The FCA is consulting on the following proposals for the new gateway:

• how applicants are assessed at the gateway,
• the basis for the FCA’s granting or refusal of applications,
• a bi-annual reporting requirement for firms that are given permission to approve financial promotions,
• a requirement on firms that are granted permission to approve financial promotions to notify the FCA when they approve, or amend or withdraw approval of, a financial promotion within seven days of doing so,
• the decision to not extend the compulsory jurisdiction of the Financial Ombudsman Service to the approval of financial promotions, and
• a number of changes made to the FCA’s non-Handbook guidance for firms that approve financial promotions for investments, as well as additional text on the Consumer Duty.

The FCA has clarified that the proposals will not be relevant to authorised persons approving:

• the financial promotions of their Appointed Representatives,
• the financial promotions of unauthorised persons within their corporate group, and
• their own financial promotions for onward communication by an unauthorised person.

Strengthening the financial promotions regime 

The introduction of this regulatory gateway is the latest in a string of changes the FCA is implementing to strengthen the rules surrounding financial promotions.

The FCA recently introduced new rules and guidance in relation to promotions of high-risk investments. This included new requirements for authorised firms who approve the financial promotions of unauthorised firms, including the explicit requirements to:

• take reasonable steps to monitor the continuing compliance of an approved promotion for as long as it is communicated, and
• not approve promotions unless they have appropriate competence and expertise in the product or service to which the promotion relates.

The implementation of the new regulatory gateway for approving financial promotions aims to ensure that the FCA is better able to adequately supervise measures like the above. This is because firms must inform the FCA about the financial promotions they approve and of the types of underlying products and services that those financial promotions relate to.

What happens next

The consultation closes on 7 February 2023. The FCA expects to publish the final rules in the first half of 2023, depending on the progress and timing of the Financial Services and Markets Bill receiving Royal Assent.

Separately we understand that the Treasury to readying legislation which would bring qualifying cryptoassets into the scope of the financial promotions regime. According to a previous policy statement, this would only take effect after a six-month transition period.