New Rules for Financial Promotions of Cryptoassets
by Haydn Jones, Mark Turner, Matteo Basso
Thu, Nov 2, 2023
On November 6, 2023, the FCA will open the Financial Promotions Gateway. Firms must apply to continue approving promotions for unregulated third parties. If not, they must cease the activity by February 7, 2024. The Gateway is the latest step taken by the FCA and HM Treasury to overhaul the regulatory regime surrounding financial promotions, following the Gloster Review and failings around London Capital & Finance (LCF).
In fact, since the Gloster Review, we have seen considerable action in the area with a rise in financial promotion supervisory cases handled by the FCA, a mass-marketing ban on speculative illiquid securities, new rules on high-risk investments, crypto assets being brought into the FCA’s remit, new guidance on social media promotions, and now the Financial Promotions Gateway.
We will give an overview of key themes from PS23/13 and provide practical guidance on what to do ahead of key dates.
Under Section 21 of the Financial Services and Markets Act 2000 (FSMA), a person must not communicate an invitation or inducement to engage in investment activity unless:
The Gateway seeks to reduce harm by limiting the likelihood of promotions by unauthorized firms breaching the financial promotion rules. The FCA will authorize certain firms to act as an “approver” of financial promotions issued by unauthorized firms. Firms must seek FCA authorization for each asset class, which is the subject of the financial promotions they wish to approve.
A firm will not need to obtain permission through the new Gateway if it is approving promotions for its appointed representatives, a member of its group, or third parties who are permitted to communicate the firm’s promotion (e.g., an unregulated distributor). Otherwise, a firm must apply to the FCA to continue to approve financial promotions.
Authorized firms can apply via the FCA Connect portal from November 6, 2023, through February 6, 2024. If firms submit their application during this time, they can continue to approve promotions until the FCA decides. If they miss the deadline, they must cease all approval activity for unauthorized persons from February 7, 2024. If a firm is already mid-application for a Part 4A authorization, it can liaise with its case officer to add the permission to its current application. However, the 12-month statutory deadline for the application assessment will begin afresh for this separate permission.d
The FCA is clear that firms must demonstrate in their application that they have appropriate competence, experience, and understanding of each of the investment products covered by the financial promotions they intend to approve. This is to mitigate the risk that firms approve promotions when they do not fully understand the underlying products and associated risks to investors and consumers. This is an actual risk, evidenced by the recent decision by the FCA to restrict a peer-to-peer firm’s ability to approve financial promotions for crypto asset firms due to concerns that customers were not adequately protected. This follows the introduction of financial promotion rules for crypto assets, which came into force on October 8, 2023.
In considering Competence & Expertise (C&E), firms should consider, at a minimum, the following:
Regardless of whether you plan to apply to the Gateway, you should have the required C&E to approve your promotions. You should have adequate systems and controls to review and approve promotions, record approvals and monitor them continuously. There is a lot to consider when assessing C&E, including, but not limited to:
We would advise, at a minimum, that firms should carry out the following exercises:
Compliance doesn’t stop at the Gateway. Section 21 approvers must report to the FCA from February 7, 2024. These reporting requirements include:
Our team of regulatory and compliance experts can assist your firm in developing a robust framework for the approval of financial promotions and helping you fill any gaps in your existing processes and infrastructure. We have experience conducting numerous compliance audits and regulatory assurance reviews, including those covering financial promotion frameworks and arrangements. Kroll can also assist you with:
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