On 19 January, 2022, the FCA published its consultation on strengthening its financial promotion rules for high-risk investments, including cryptoassets (CP22/2). The consultation proposes some fairly onerous requirements and we expect that many of our clients will want to respond to this paper. We’ve summarised some of the key changes being proposed below.
- Classification of high-risk investments.
Following feedback that the COBS 4 rules were challenging to navigate and understand, the FCA proposes to rationalise the COBS 4 rules as follows:
| New category | Investments included | Mass marketing rules |
|---|---|---|
| “restricted mass market investments” (RMMIs) | · non-readily realisable securities (e.g., shares or bonds not listed on an exchange);
· qualifying cryptoassets; and · P2P agreements |
Mass marketing will be allowed to retail investors subject to certain restrictions |
| “non-mass market investments” (NMMIs) | · non-mainstream pooled investments (e.g., pooled investments in an unauthorised fund – such as an unregulated collective investment scheme); and
· speculative illiquid securities (e.g., speculative mini-bonds) |
Mass marketing will be banned to retail investors |
- Consumer journey into high-risk investments.
The FCA explain in the consultation that it is concerned that too many consumers are just “clicking through” and accessing high-risk investments without understanding the risks involved. The FCA’s existing marketing restrictions are intended to ensure consumers only access high-risk investments knowingly, however, the FCA state that consumer research shows this approach is not working as well as it could.
The FCA proposals include:
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- a ban on financial promotions for high-risk investments from containing any monetary and non-monetary benefits that incentivise investment activity (which include cryptoasset incentives);
- for RMMIs (see definition above):
- a new risk warning will be required, and a link must be provided for the customer to obtain further prescribed information regarding the risks of investing. The proposed risk warning is: “Don’t invest unless you’re prepared to lose all your money invested. This is a high-risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2min to learn more.”;
- a personalised risk warning pop-up must be displayed for first time investors with a firm before receiving a direct offer financial promotion;
- a 24-hour cooling off period for first time investors with a firm before the customer can receive the direct offer financial promotion;
- consumers will be required to state why they meet the relevant criteria for an exemption (e.g., restricted investor, HNW investor, self-certified sophisticated investor (this exemption will not apply to cryptoasset products), or certified sophisticated investor). For example, this may require the customer to state their income to demonstrate they are high net worth; and
- RMMI specific requirements on the appropriateness assessment must be complied with. The FCA proposes introducing stronger appropriateness tests (including restricting the number of retakes that a potential customer can have and restricting the guidance firms can provide to the customer during the assessment).
Cryptoasset firms should note that these new rules will also apply to promotions of qualifying cryptoassets.
- Strengthening the role of firms approving and communicating financial promotions.
Last year, the Treasury confirmed that it intends to amend the financial promotion approval regime by establishing a regulatory gateway for the approval of financial promotions made by unauthorised persons. The current financial promotion regime will be amended so that financial promotions made by unauthorised persons can only be approved by certain regulated firms that have been given permission by the FCA to approve financial promotions of unauthorised firms.
In addition to the new regulatory gateway, the FCA wants to strengthen the role of a section 21 approver (a regulated firm that approves financial promotions for others) as it believes that they play an important role in enabling unauthorised issuers of high-risk investments to reach consumers. The regulator states that it wants to develop a robust regime to complement the proposed section 21 gateway which, when implemented, will hold section 21 approvers to high standards. The proposals include:
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- a rule that will require firms to self-assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a relevant financial promotion;
- a rule to require section 21 approvers to have a continuing relationship, with those for whom they approve promotions, for the life of the promotion and to actively monitor it after approval for any changes that might mean the promotion no longer complies;
- extending the conflict-of-interest rules to cover the approval of financial promotions;
- a rule that requires section 21 approvers to collect attestations of ‘no material change’ from clients with approved promotions every three months, and for the lifetime of the approved promotion; and
- requiring firms when approving promotions subject to an appropriateness test, to check the compliance of appropriateness tests periodically, throughout the lifetime of a promotion.
- Applying financial promotion rules to qualifying cryptoassets.
Following the government confirming that it intends to extend the scope of the financial promotion perimeter to include qualifying cryptoassets, the FCA is consulting on how it will categorise these cryptoassets once they are brought into the financial promotion regime.
The FCA intends to generally apply the same rules to cryptoassets as currently applied to non-readily realisable securities and P2P agreements. However, it is important to note that the proposals state that it should not be possible for ‘direct offer’ financial promotions of qualifying cryptoassets to be made to self-certified sophisticated investors. Financial promotions relating to cryptoassets will need to comply with COBS 4.
The consultation closes for comments on 23 March, 2022 and the FCA intends to confirm its final rules this summer 2022.
Firms will have three months from the FCA publishing the final rules to comply with the new requirements for the consumer journey and for section 21 approvers. The cryptoasset promotion changes will apply from the date that qualifying cryptoassets are brought within the financial promotion regime.