Cryptoasset promotions: sweat the small stuff

The FCA has published a consultation paper setting out its approach to strengthening its financial promotion rules for high risk investments. As Tim mentioned in his blog post, this is connected to HM Treasury publishing a paper bringing cryptoassets within the financial promotions regime.

The FCA is concerned that, currently, too many consumers are ‘clicking through’ websites and accessing high-risk investments without understanding the risks involved. It observes that a high percentage of individuals wrongly believe that cryptoassets are regulated by the FCA, and a large percentage of investors are driven by social and emotional factors, such as competitiveness. While there are existing marketing restrictions designed to attenuate consumer harm, including that promotions must be clear, fair and not misleading, the FCA feels that these should be strengthened.

Proposed changes include more explicit risk warnings, a ban on inducements to invest, positive frictions (such as a 24-hour cooling off period), new evidence requirements for client categorisation and stronger, stricter appropriateness tests intended to gather information on an investor’s knowledge and experience in the relevant investment field. The FCA is considering how to incorporate ‘behaviourally informed risk warnings’, and intends to prescribe the font size for the risk warning (not smaller than the standard size used in the financial promotion), the background colour (it should sufficiently contrast the text), and the location (not at the bottom of the promotion or embedded with other standard information (i.e. legalese). Drilling down into cryptoassets, and taking its lead from the Treasury, the FCA intends to treat these as ‘Restricted Mass Market Investments’. Mass marketing of these products will be allowed to retail investors subject to certain restrictions detailed in the consultation paper.

Once final rules with these measures have been published (expected to be summer 2022), the FCA proposes to give firms 3 months from publishing final rules to comply. The general trajectory, bearing in mind the FCA's adjacent plans for a new Consumer Duty, its focus on vulnerable customers and now the addition of cryptoassets to the sphere of financial promotions, indicates that, for better or worse, we are heading reasonably rapidly to a more exacting approach to consumer protection in financial services. Firms that engage in this area, or aspire to engage in it, should bear this in mind, and consider their ability to adapt consumer-facing materials to meet those rising standards.