What should you know now the UK financial promotions regime for cryptoassets has come into force? Zumo Head of Compliance Michael Johnson shares his thoughts on the way forwards for cryptoasset businesses wishing to serve the UK market.

UK financial promotions rules governing cryptoassets have arrived with a bang: paused and withdrawn services; 146 businesses placed onto the Financial Conduct Authority (FCA) warning list on the first day; and the regulator warning it will take robust action, including through engagement with social media platforms, app stores, search engines, domain name registrars and payments providers, to police its new rules and make sure non-compliant firms are unable to do business in the UK. Ultimately, failure to comply is a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both – and applies to any overseas business marketing to UK consumers just as much as it does to UK-based businesses.


This presents obvious challenges to firms which have had to implement on tight timelines – and may not even have been aware they were caught up in the rules in the first place. Having gone through the process of operationalising these new requirements for the Zumo digital asset platform, and speaking with Bloomberg and a number of media publications in recent days, here are my condensed answers to the most common questions I hear and, just as importantly, how practically your business may be able to move forwards if you haven’t yet lined up a solution. 


Q1 What are the rules?


The rules for cryptoasset promotions are set out in the FCA’s policy statement PS23/6 and a now-concluded guidance consultation to the implementation of the ‘fair, clear and not misleading’ aspect of financial promotions in GC23/1. This was followed by a guidance consultation on financial promotions on social media in GC23/2.


Three main points to highlight are: 


(a) the four routes by which firms may remain compliant, which amounts to 1/ communicating promotions as an authorised person 2/ having promotions approved by an authorised person 3/ communicating promotions as a cryptoasset business registered with the FCA under the Money Laundering Regulations (MLRs) 4/ proving that the promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.


(b) the rules apply not only to marketing in terms of the outwardly facing communication of financial promotions, but also to multiple aspects of the consumer journey, including for example a prescribed cooling off period, personalised risk warnings, and ongoing client categorisation and appropriateness assessments.


(c) the new regime is applicable to overseas firms marketing to UK customers, not just UK-based companies.


Q2 What is the difference between FCA-registered and unregistered firms in relation to compliance obligations?


Arising out of the compliance pathways mentioned above, the difference between FCA registered and unregistered firms is primarily the ability for the former to approve their own financial promotions. The FCA’s communications about the matter have referred to the availability of a short-term limited modification to the regulations for registered firms to fall back on, if they were unable to meet the original 8 October deadline.


Any FCA unauthorised or unregistered firm will, however, need to find an alternative solution if it wishes to continue business in the UK. 


Q3 What then are the routes available for unregistered firms, and what barriers should I be aware of?


The compliant options available to unregistered firms are now severely limited – leave the market, or pause customer trading while becoming FCA registered or entering into a partnership with an authorised ‘s21 approver’ firm. 


There are relevant considerations with both routes: in the case of S21 approvers, the need for the FCA to be convinced that the approver possesses the relevant set-up, competence and expertise, which has already proven far from straightforward (not to mention, unregistered firms must surpass a certain due diligence threshold for S21 approvers to consider working with them); and in the case of FCA registration, an assessment of whether requirements can be met (updated FCA figures coincident with the go-live of financial promotions putting lifetime registration approval rates at 14% of applications) as well as the time and resource it will take to do so.


Q4 Suppose that these unregistered, overseas firms ignore the warnings and just keep breaking the rules, and then ignore enforcement action. Would the FCA eventually just block the whole website/app in the UK?


Only time will tell if this is indeed the case, and what the true impact would then be.


On all accounts, the FCA has made it clear that it will ‘take robust action to remove illegal content’. The expectation is that the FCA will engage with and influence social media channels and payment services providers to cease their partnerships with non-compliant firms. This presents an opportunity for compliant firms to improve their market share of the captive UK retail consumer market. 


This may also extend to the FCA targeting app stores to remove access to the app in question, and this would also mean that search engines and social media channels would lose the listings. I also think the FCA would instruct the UK financial institutions that are permitting any fiat transfers to desist. And I expect the FCA will put pressure on other regulators to take action.


It’s worth pointing out that non-compliant entities’ activities may breach laws, and would therefore fall into the scope of the Proceeds of Crime Act. 


Q5 What can I do if I am an unregistered firm looking for a financial promotions solution?


As we’ve discussed, the compliant options available to unregistered firms are at this point in time relatively constrained.


At Zumo, we’ve done a significant amount of work to make our own offering financial promotions compliant from day one and, as an infrastructure provider, we have an additional option to put on the table: a referral to Zumo (subject to the restrictions of the financial promotions regime) with a revenue share. The approach could take a number of formats, with the most appropriate being determined during exploratory conversations.


We encourage unregistered firms who are currently seeking a solution to reach out and have a conversation with us. You can find out more at: https://zumo.tech/navigating-the-uks-financial-promotions-regime-with-zumo/