HMT consultations on financial promotions: approving promotions and promoting cryptoassets

HM Treasury has announced two consultations on possible changes to the UK financial promotions regime:

• a consultation on limiting the scope of firms that can approve financial promotions of unauthorised persons; and
• a consultation on extending the financial promotions regime to include unregulated cryptoassets.

The deadline for responses to both consultations is 25 October 2020.

These consultations reflect the continued focus by the Financial Conduct Authority (FCA) on marketing and the related risks to consumers, particularly following the mini-bond scandal, as well as the continued focus on the regulation of fintechs and cryptoasset technologies.

Consultation on regulatory framework for the approval of financial promotions

The government is proposing to amend the Financial Services and Markets Act 2000 (FSMA) so that authorised firms’ ability to approve financial promotions of unauthorised persons will be restricted. Firms would need to pass through a ‘gateway’ (described further below) before they could approve such promotions. The consultation cites particular concerns that some firms are approving promotions without the proper expertise in the subject area, or that firms are not properly reviewing promotions and the products or services to which they relate. The consultation also notes challenges faced by the FCA in properly supervising firms that approve promotions.

HMT has proposed two options for the ‘gateway’:

• all authorised firms are subject to a requirement that they may not approve promotions of unauthorised persons, and firms must apply to the FCA to remove or vary the requirement; or
• approving financial promotions of unauthorised persons is a regulated activity for which a specific permission is needed.

In both cases, section 21 of FSMA would need to be amended to reflect the new arrangements. However, the government has identified that the regulated activity option would represent a much more significant change to the regulatory framework and treatment of financial promotions, and has indicated that it currently prefers the FCA requirement option.

Consultation on promotion of cryptoassets

In parallel, HMT is proposing to extend the scope of the financial promotions regime to include currently unregulated cryptoassets. The consultation cites identified risks to consumer protection, market integrity and financial crime.

Currently, “security tokens” generally fall within the financial promotions regime and e-money tokens are regulated under the Electronic Money Regulations 2011. The proposed amendments would bring currently unregulated cryptoassets, including “utility tokens” and “exchange tokens”, into the scope of the financial promotions regime.[1] The consultation also indicates that HMT would seek to extend the regime to restrict the issuance of white papers for cryptoassets.

The consultation contains additional thinking in relation to other consequential changes to the regime to accommodate the inclusion of cryptoassets generally (including to the regime’s “controlled activities” and exemptions). The impact on firms could be even more material if the scope of firms that can approve the financial promotions is also limited.

HMT’s consultation is the latest in a series of regulatory steps to raise awareness of and protect consumers from the risks attaching to unregulated cryptoassets.  The FCA has sought to address this issue through a variety of initiatives: it has published a number of consumer warnings about the risks of initial coin offerings, investing in cryptocurrency CFDs, and cryptoasset investment scams. The FCA has also published a policy statement which finalised rules restricting the sale of CFDs and CFD-like options to retail clients, including setting 2:1 leverage limits on contracts that reference cryptocurrencies, and the outcome of its consultation on banning the sale, marketing and distribution of derivatives and exchange traded notes referencing cryptoassets to all retail consumers is expected shortly.

As noted above, this consultation comes at a time of intense regulatory focus on fintechs and cryptoasset technologies. Below are some of the other expected developments which will be of relevance to the cryptoassets sector:

[1]       See FCA CP 19/3 for the definitions of “security tokens”, “utility tokens” and “exchange tokens”.