Financial promotion rules: can registered UK firms act as brokers for unregistered crypto firms?

The UK Government has legislated to bring certain cryptoassets within scope of the financial promotion regime via the Cryptoasset Financial Promotion Amendment Order 2023, which amends the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO).

The definition of a financial promotion is very broad and applies to a wide range of communications made by a firm including its website, mobile apps, social media posts and online advertising. All firms marketing cryptoassets to UK consumers, including firms based overseas, must comply with this regime. Once the regime is in force, unauthorised and unregistered crypto businesses will only be able to communicate financial promotions which have been approved by an authorised person or are within the scope of certain narrow exemptions in the FPO. All cryptoasset firms targeting UK consumers, including those based overseas, must align with the UK’s financial promotions regime by 8 October 2023.

The FCA expects that the vast majority, if not all, of cryptoasset firms providing services to UK consumers will be in scope of this regime when it comes into effect. This regime is important for reducing and preventing harm through fraud. Unregistered cryptoasset firms continuing to promote cryptoassets to UK consumers once the regime enters into force, without having an authorised person approve the promotion, are likely to be in breach of section 21 of the Financial Services and Markets Act 2000 (FSMA). This would be a criminal offence punishable by up to two years’ imprisonment, an unlimited fine, or both.

What are the consequences for failing to comply?

Those companies illegally promoting to UK consumers could be placed on a FCA Warning List which could result in the FCA taking steps to remove or block any illegal financial promotions to be found on websites, social media accounts and apps.

The FCA would have the power to apply to the court for injunctions, seeking payment of compensation or, in the most serious cases, criminal prosecution. Under section 30 of the FSMA, contracts entered into as a result of unlawful communications by firms may be legally unenforceable against a UK consumer, who is entitled to recover:

(a) any money or other property paid or transferred under the agreement; and

(b) compensation for losses sustained as a result of having parted possession with it.

Who do the rules apply to?

Those enforcing this regime need to work with global partners, including regulatory counterparts in other jurisdictions and international standard-setting bodies, to seek co-operation and assistance against firms breaching UK regulation. Cryptoasset firms based in the England and Wales jurisdiction or unregistered firms could potentially approach UK-based companies as intermediaries. Cryptoasset firms which cannot legally communicate financial promotions to UK consumers are expected to have robust systems and procedures to prevent UK consumers accessing and responding to promotions they provide. Any businesses supporting unregistered cryptoasset firms would need to consider their obligations under the Proceeds of Crime Act 2002 (POCA) to report suspicious activity.

Intermediaries that support unregistered cryptoasset firms to make illegal financial promotions should also consider their obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to ensure that they remain compliant.

A person who decides to acquire or increase control over an FCA-registered cryptoasset firm – so that they become a beneficial owner within the meaning of Regulation 5 or Regulation 6 of the MLRs – must submit a change in control notification and await FCA approval before completing the transaction. It is a criminal offence to acquire control of an FCA-registered cryptoasset firm without FCA approval.

The FCA found that most firms have faced significant challenges in preparing for the financial promotions regime. This has been mainly as a result of how apps and websites and social media posts fall under the regulations of the regime. Unregistered cryptoasset firms can legally communicate financial promotions to UK consumers if those promotions are approved by an authorised firm. In approving a promotion, an authorised firm must comply with the relevant rules.

The FCA also expects firms to consider how they will stop promoting cryptoassets if they cannot comply with the new regime; and withdraw or restrict access to crypto promotions (e.g. websites) that do not comply with the new regime.

The amended MLRs include additional powers for the FCA to maintain a robust AML/CTF cryptoasset supervisory regime, such as:

(a)        Skilled Person Reviews, and

(b)        Reporting Requirements and

(c)        the power of giving directions to a business before, on or after registration for the purpose of: (i) remedying a failure to comply with the MLRs;(ii) preventing a failure to comply or continued non-compliance under the MLRs; or (iii) preventing the business from being used for ML/TF.

For advice and representation on all aspects of compliance issues with FCA regulation or crypto regulation contact Louise Abbott.

This article is co-authored by Andrew Maguire of Littleton Chambers.