Dear Sir/Madam | Release Date: 7th September 2023
To read a shorter summary of this Dear Sir/Madam letter, click here.
To access the original FCA document, click here.
Long Summary
Following the issuance of Policy Statement PS23/6 on June 8, 2023, the Financial Conduct Authority (FCA) has outlined new financial promotion rules for cryptoassets that will take effect from October 8, 2023. These rules are designed to safeguard consumers from investments in cryptoassets that may not align with their risk tolerance by ensuring they make informed decisions based on fair and accurate information. The introduction of these rules is expected to foster a fairer and more consumer-focused competitive landscape, enhancing the ability of firms to innovate within clear regulatory guidelines.
Firm Preparations for New Financial Promotions Rules
In preparation for the new regulations, the FCA has engaged with various cryptoasset firms to gauge their readiness and address potential challenges. These discussions have revealed that while most firms are well-prepared for the front-end requirements of the financial promotions, significant challenges persist with the back-end aspects such as personalised risk warnings, a 24-hour cooling-off period, client categorization, and appropriateness assessments. These areas require substantial system overhauls and operational adjustments.
Challenges Highlighted in Firm Preparations
The primary challenges identified relate to the complexity of implementing back-end financial promotion rules and the recent enforcement of the Travel Rule. Many firms have prioritised compliance with the Travel Rule due to its earlier implementation deadline, potentially delaying full readiness for the financial promotions regime. Additionally, firms embedded in global group structures face the need to significantly restructure their operations to ensure compliance with the new UK regulations.
Modification by Consent for Back-End Rules
Recognising the challenges faced by firms, the FCA is offering a modification by consent to delay the implementation of specific back-end financial promotion rules. This modification will postpone the application of rules related to personalised risk warnings, the cooling-off period, client categorisation, and appropriateness assessments until January 8, 2024. This grace period aims to provide firms with additional time to establish the necessary systems and controls to comply fully with the regulations.
Next Steps for Compliance
Firms are encouraged to apply for the modification by consent if they anticipate difficulties meeting the October 2023 deadline for the back-end rules. The application process involves contacting the FCA with the firm’s details and an intention to consent to the modification. Despite the modification for back-end rules, all other financial promotion regulations will still come into effect in October 2023, including requirements for fair, clear, and non-misleading promotions and restrictions on who can legally promote cryptoassets to UK consumers.
Actions for Firms
Review and Adjust Systems: Firms must review their current systems and processes to ensure they align with both the front-end and modified back-end requirements of the financial promotions rules.
Apply for Modification: Eligible firms should apply for the modification by consent promptly to ensure they can meet the adjusted January 2024 deadline for back-end rules.
Engage with the FCA: Maintain open communication with the FCA to address any uncertainties or challenges in meeting the new requirements.
Prepare for Full Compliance: Despite the modification, firms should prepare to fully comply with all financial promotion rules by the stipulated deadlines, ensuring that all promotional activities are fair, clear, and not misleading.
Monitor and Adapt: Continuously monitor the effectiveness of implemented changes and be prepared to adapt strategies to meet regulatory expectations and market developments.
Conclusion
The introduction of the cryptoasset financial promotion rules marks a significant step towards enhancing consumer protection in the rapidly evolving crypto market. By ensuring that firms provide transparent and accurate information, the FCA aims to create a safer investment environment for consumers and a more stable and competitive market for firms.