On 19 January 2022, the Financial Conduct Authority (FCA) published its Consultation Paper (CP 22/2), in which it proposes to significantly strengthen the rules on the promotion of high-risk financial products. This Consultation Paper forms part of the FCA's Consumer Investments Strategy, published in September 2021, which aims to reduce the number of consumers who are investing in high-risk products that are not aligned to their needs.
In publishing CP 22/2, the FCA built on it's earlier Discussion Paper (DP21/1) (published 29 April 2021), which highlighted three areas where regulatory changes could be applied to protect consumers from harm when investing in high-risk/ speculative financial products. These were:
- the classification of high-risk investments;
- the segmentation of the high-risk investment market; and
- the responsibilities of firms which approve financial promotions.
Crucially, the FCA confirmed that any new rules on financial promotion will extend to ‘qualifying’ cryptoassets. The FCA’s announcement came a day after the Treasury’s Cryptoassets Promotion: Consultation response, which stipulates that, in order to combat significant consumer risks created by misleading advertising and a lack of suitable information in the cryptoassets market, the Government will extend the current financial promotion regime to cover ‘qualifying’ cryptoassets (which broadly captures cryptoassets that are "fungible" and "transferable"). Behavioural research conducted by the FCA shows that cryptoassets pose a severe risk to consumers, particularly younger investors: young people are more exposed to aggressive online advertising through social media, and the fact that high-risk investment products are less suitable, given that nearly two thirds (59%) claim that a significant investment loss would have a fundamental impact on their current or future lifestyle.
Due to its concerns relating to online cryptoasset advertising, the FCA launched its GBP11 million InvestSmart campaign, together with its first ever TikTok video and Instagram live session in October 2021, targeting its "don’t get played" message at younger, higher-risk investors. The FCA also established the Unregistered Cryptocurrency Businesses List, designed to help consumers identify cryptoasset firms that appear to be continuing business in the UK but are not registered with the FCA or have not sought such registration.
Over the past year, the FCA has developed an increasingly combative stance against crypto-providers’ online advertising. In January 2021, the FCA gave a stark warning that “investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money.” The FCA has supported this stance with active intervention against cryptoasset adverts which may be misleading. In June 2021, the FCA issued a consumer warning about Binance Markets Limited, announcing to consumers that Binance Markets is not permitted to undertake any regulated activity in the UK, and cautioned investors to be wary of its online advertising for cryptoassets. One month later in July 2021, the FCA warned investors and consumers about CoinBurp, warning that their promotions around token issuance were misleading and that CoinBurp had so far failed to register itself under Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The FCA warned that consumers would have very limited financial recourse if they lost their money in one of these investments.
Strengthening of the financial promotions regime and the inclusion of cryptoassets
The current financial promotions regime consists of:
- Section 21 of the Financial Services and Markets Act 2000 (FSMA), which sets out the financial promotion restriction. This restriction is broad in scope, and provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or claims management activity. Breaching section 21 FSMA is a criminal offence.
- The FSMA (Financial Promotion) Order 2005 (FPO), which includes a number of exemptions from the financial promotion restriction. These permit an unauthorised person to communicate a financial promotion in certain circumstances and subject to certain conditions.
- The FCA’s rules which apply to authorised firms when communicating or approving financial promotions including, for example, the requirement that financial promotions must be fair, clear and not misleading; this requirement is set out in the FCA’s rulebook, in the Conduct of Business Sourcebook (COBS) 4.
Under CP 22/2, the FCA is proposing to strengthen the financial promotions rules for high‑risk investments. ‘High‑risk investments’ refer to those investments which are subject to marketing restrictions under the FCA. This includes investment based‑crowdfunding (IBCF), peer‑to‑peer (P2P) agreements, other non‑readily realisable securities (NRRSs), non‑mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs).
As per the Treasury’s recommendation (see above), cryptoassets will also be classified as ‘High-risk Investments’ and brought within the scope of the financial promotion rules for the first time. Part of the FCA’s consultation under CP 22/2 is to decide upon how best to categorise cryptoassets once they are brought into the financial promotion regime. Cryptoassets are notoriously difficult to categorise and are in a constant state of evolution – broadly speaking, they are typified by a digital asset or token that depends on cryptography and exists on a distributed ledger (i.e. blockchain). Cryptoassets can be categorised into three main categories: payment tokens/coins, which are predominantly used as a medium of payment (such as Bitcoin); investment tokens/security tokens, which are tied to an underlying security and can provide profit-rights, such as rights to dividends in a digital bond; and utility tokens that serves a use case within a specific ecosystem, and may grant access to a service or product (e.g., Binance Coin, which provides users with a discount in trading fees).
For now, the FCA proposes to apply the same rules to cryptoassets as currently applied to NRRSs and P2P agreements (collectively this category will be referred to as ‘Restricted Mass Market Investments’). As such, financial promotions relating to cryptoassets will need to comply with the existing financial promotion rules in COBS 4, including the requirements for the promotion to be clear, fair and not misleading, and will be subject to strengthened rules regarding customer journey (please see below).
The FCA has clarified that ‘Direct Offer’ Financial Promotions of qualifying cryptoassets made to self‑certified sophisticated investors will remain unrestricted under the FPO. This would ensure that only restricted, high net worth or sophisticated investors could respond to online cryptoasset financial promotions.
Under the proposed rules, the FCA will seek to bolster the financial promotions regime in three core ways:
- Improving its classification of high-risk investments:
The FCA wants to ensure that a consumer’s investment suits their risk tolerance. As such, the FCA intends to rationalise its rules under COBS 4 regarding ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments’, particularly given that cryptoassets will now be included in such categorisations, to provide clarity to consumers in what investments they should/ should not be making. - Tightening the ‘consumer journey’:
The FCA will bolster consumer protection by stipulating that any advert offering high-risk investments must implement a robust questionnaire for consumers to complete before they would be able to access the investment. In particular, the FCA wants to prevent simple questions that consumers can easily click through without really understanding the investment risks involved.
Moreover, qualifying high-risk investments will have risk warnings imposed on their ads, and may be banned from promoting investment incentives such as ‘new joiner’ or ‘refer-a-friend bonuses’. - Strengthening firms that approve and communicate financial marketing
Concurrently, the FCA is developing proposals for a new regulatory gateway under section 21 FSMA, known as the ‘s21 gateway’. These gateways allow authorised firms (known as ‘s21 approvers’) to approve the financial promotions of unauthorised firms.
Given that s21 approvers play an important role in enabling unauthorised issuers of high‑risk investments to reach consumers, the FCA intends to develop a more robust regime for s21 approvers, to ensure they have the relevant expertise and understanding of the investments being offered.
Next steps
The deadline for feedback to CP 22/2 is 23 March 2022, with a subsequent Policy Statement and final Handbook rules expected to be published in summer 2022. The FCA proposes firms have three months from the publishing of final rules to comply with the new requirements for the consumer journey and the new requirements for s.21 approvers.
In the meantime, the FCA will continue with its InvestSmart campaign and their ongoing Supervisory and Enforcement action to address harm in the mass‑marketing of speculative illiquid securities.
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