HM Treasury is planning significant changes to the financial promotion regime, including expanding its scope to certain cryptoassets, and amending the approval process for promotions of unauthorised firms.
By Stuart Davis, Sam Maxson, and Anna Lewis-Martinez
On 20 July 2020, HM Treasury published two consultation papers on a regulatory framework for approval of financial promotions and cryptoasset promotions. The consultations propose to establish a regulatory “gateway” that a firm must pass through before it is able to approve the financial promotions of unauthorised firms, and to bring certain types of cryptoassets into the scope of financial promotions regulations.
The aim of the proposals is to provide better protections against misleading and inadequate promotions for consumers of financial products and cryptoassets. The Economic Secretary to the Treasury and City Minister, John Glen, stated, “It’s important that people can understand the financial products they see promoted. If adverts by unauthorised firms are misleading, or don’t fully outline the risks, then people can end up losing money. That’s why we want to put more protections in place around such financial promotions, including the promotion of cryptoassets, while continuing to ensure people have access to a wide range of products on the market.”
Regulatory Framework for Approval of Financial Promotions
The government considers that the current requirement for an authorised firm to approve the financial promotion of an unauthorised firm may not operate as a strong enough safeguard to ensure promotions comply with FCA rules that they are fair, clear, and not misleading. Any authorised firm is able to approve any financial promotion of an unauthorised firm, as set out in section 21(2)(b) of the Financial Services and Markets Act 2000 (FSMA), without any restriction. Legislation does not currently provide a specific regime for the FCA to assess the suitability of an authorised firm before it begins approving such promotions.
In order to strengthen the FCA’s ability to ensure that the approval of financial promotions operates effectively, the government proposes to amend FSMA so that the general ability of authorised firms to approve the financial promotions of unauthorised firms is removed. Instead, unauthorised persons would only be able to communicate financial promotions that were approved by a firm that had obtained the FCA’s consent to provide such approval. This will enable the FCA to operate a specific gateway that a firm is required to pass through before it could approve the financial promotions of unauthorised persons.
The proposed change would, in the government’s view, lead to several improvements in the regulatory regime for financial promotions communicated by unauthorised persons, including: more effective FCA oversight and supervision; more effective prevention and intervention; ensuring approver firms have the relevant expertise; and improved due diligence.
The government has proposed two options to introduce the new “gateway”:
- Amend section 21(2)(b) FSMA so that unauthorised persons are only able to communicate their own financial promotions if they have been approved by a firm that has obtained the FCA’s consent to provide such approval
- Specify the approval of financial promotions communicated by unauthorised persons as a “regulated activity” under FSMA, which would involve amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), to make the approval of financial promotions of unauthorised persons a regulated activity with firms requiring a Part 4A permission from the FCA, and amend section 21(2)(b) FSMA to provide that only financial promotions of unauthorised persons approved by a firm with the relevant Part 4A permission can be lawfully communicated
The government clearly states that the proposal will not affect the way authorised firms currently communicate their own financial promotions, approve their own promotions for communication by unauthorised persons, or approve the promotions of unauthorised persons within the same corporate group.
The promotion of cryptoassets that do not amount to regulated investments or electronic money is currently unregulated in the UK, but their rapid increase in popularity, and the fact that they are often targeted towards retail investors, highlights the importance of promotions openly setting out the risks involved. As such, the government proposes “to expand the perimeter of the financial promotions regime in order to enhance consumer protection while the government continues to consider its approach to the broader challenges of cryptoasset regulation”. This would mean that the promotion of otherwise unregulated cryptoassets would be held to the same high standards for fairness, clarity, and accuracy that apply to traditional financial services promotions.
The government proposes to implement this change by adding certain types of unregulated cryptoassets to the list of controlled investments in Part 2 of Schedule 1 to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). The government’s proposed definition of “qualifying cryptoassets” to be covered by the FPO as controlled investments is “any cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology” that is both fungible and transferable. The proposed definition does not include cryptoassets that amount to regulated investments (such as security tokens) or electronic money, on the basis that these cryptoassets are already captured by UK financial regulation. Further, currency issued by a central bank or other public authority would not be caught by the definition.
The government intends to amend the controlled activities in the FPO to incorporate activities in relation to the buying, selling, subscribing for, or underwriting of “qualifying cryptoassets”. The government also proposes to add a new FPO exemption to ensure that vendors merely offering to accept qualifying cryptoassets in exchange for goods or services, and buyers merely offering qualifying cryptoassets to pay for goods or services, in the same manner as they would use fiat currency payments, will not be captured under the new regime.
Notably, the UK financial promotion regime may apply to any communication that is “capable of having an effect in the UK”, and so this change may be relevant to cryptoasset businesses that market their services in the UK from overseas, in addition to cryptoasset businesses that are established in the UK.
The government consultation on whether the regulatory perimeter more broadly should be expanded to capture currently unregulated cryptoassets has been long awaited (since October 2018, when it was first mentioned in the Cryptoassets Taskforce Final Report). The government states in the current consultation on cryptoasset promotions that it considered alternative options for addressing the consumer protection risks in relation to unregulated cryptoassets, including “expanding the scope of the RAO to designate these assets as “specified investments”. This would require a firm to become an authorised person in order to carry out a range of cryptoasset activities (such as dealing in cryptoassets) — not just cryptoasset promotions. By becoming authorised, the firm would be subject to FCA regulation and supervision when carrying out those activities. Further analysis is required to determine whether this is an appropriate and proportionate action. HM Treasury committed at Budget in March 2020 to consult on the UK’s broader regulatory approach to cryptoassets, including stablecoins, later in 2020. This option has not been ruled out ahead of that consultation. However, at present and pending further analysis of the market to fully assess its distinctive and still-evolving technological features and risks, the government is not pursuing this option at this time.”
Certain types of unregulated cryptoassets, therefore, look set to become controlled investments under the FPO, although not yet specified investments under the RAO until this is consulted on later in the year.
The deadline for responses for both consultations is 25 October 2020. Cryptoasset businesses that conduct relevant activities in relation to unregulated cryptoassets in the UK (whether from an establishment in the UK or overseas) should now consider whether they will need to prepare financial promotions in compliance with the FCA’s rules, as the government is not proposing to provide a transitional period before the proposed amendments to the FPO come into force, should it go ahead with the changes being consulted on.
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