In June 2023, the FCA introduced new requirements for promoting qualifying cryptoassets to retail clients, known as the ‘back end’ rules. These rules aim to enhance consumer protection and ensure that firms adhere to high standards when promoting cryptoassets. The key components of these rules include a 24-hour cooling-off period, personalised risk warnings, client categorisation and appropriateness assessments. You can find more information on these new rules in our recent article.
The FCA has recently published details of its review into the standards achieved by a sample of firms active in this area. The FCA’s comments can be found on its website and are summarised in this article.
The FCA’s Findings
The FCA’s recent assessment of firms’ compliance with these rules revealed a mix of good and poor practices. While some firms have successfully integrated the new requirements, others still need significant improvements to meet the expected standards. We have set out some of these below.
- Cooling-off period
Good practice included:
- Giving clear information that there is a cooling-off period and explaining its purpose
- Displaying information indicating the time remaining before the cooling-off period ends without pressurising consumers
Poor practice included:
- Not providing information about the reason for the cooling-off period
- Not giving consumers the clear option to proceed or leave the investment journey at the end of the cooling-off period
- Risk warnings
Good practice included:
- Positioning the warning on its own page with no other information, making the warning the sole focus for the consumer
- Including clear processes for consumers who wish to leave the investment journey
Poor practice included:
- Including frictions for consumers who wish to leave the journey
- Using language in the personalised risk warning that downplays the risks of the assets or encourages consumers to proceed with the journey
- Client categorisation
Good practice included:
- Giving an option to leave the journey if the consumer does not meet the criteria of the available categories
- Verifying the submissions of all consumers who categorise themselves as “certified-sophisticated” investor and rejecting any submissions which do not meet the requirements
Poor practice included:
- Not taking steps to check that the information provided in the categorisation statements aligns with the criteria for that particular category. For example, not checking that the consumer has given the name of a genuine FCA authorised firm when being categorised as a certified-sophisticated investor
- Changing the wording of the investor statements from the prescribed language in the Handbook
- Appropriateness assessment
Good practice included:
- Assessments cover all appropriate topics outlined in COBS 10 Annex 4G, and specific risks of each cryptoasset type offered
- Providing information on the general topics a consumer answered incorrectly to allow them to research before retaking the assessment
Poor practice included:
- Asking leading or simplistic questions that direct the consumer to the correct answer
- Treating the assessment as an educational tool for the consumer, instead of assessing if the consumer has relevant knowledge or experience of the products
- Record keeping
Good practice included:
- Capturing real-time data of frictions during onboarding and using this to improve the journey and ensure the frictions are working effectively
- Incorporating data analysis into reporting at various levels, including the Board, to enable continuing monitoring and improvements
Poor practice included:
- Not having a clearly defined path of how to use data recorded
- Not taking reasonable steps to verify the accuracy of data provided
- Due diligence
Due diligence is a key component of the FCA’s financial promotions regime. The FCA has provided guidance to firms on conducting due diligence on both the cryptoasset or cryptoasset service being promoted and claims made in the promotion before communicating a financial promotion.
Approach to conducting due diligence
Good practice included:
- Having clear criteria for when a cryptoasset would fail the due diligence process
- Thorough processes for considering operational and technology risks, such as reviewing smart contract code and network stability
Poor practice included:
- Being unable to explain how and when a cryptoasset would fail due diligence requirements and unable to explain risk appetite for promoting cryptoassets
- Not considering how to conduct due diligence on an ongoing basis. For example, not considering what systems and controls would be required to monitor cryptoassets for market events that would materially impact the fairness and accuracy of promotions or the risk profile of the cryptoasset
Use of due diligence
Good practice included:
- Using information gained in the due diligence process to inform consumers about the specific cryptoasset being promoted and not just using it to make a binary, Yes/No decision on whether or not to promote the asset
- Having systems to automatically flag events that might impact the fairness of promotions and the specific promotions that may be affected
Poor practice included:
- Not considering the full range of decisions that due diligence can help inform
- Not considering how omissions of information may lead to non-compliant promotions
Due diligence on cryptoassets that claim a form of stability
Good practice included:
- Considering the due diligence required specifically for cryptoassets that claim a form of stability
- Conducting thorough due diligence to assess any claims of stability, including conducting due diligence on the nature of the stabilisation mechanism, the quality of backing assets, how any backing assets are custodied, the regulated status of the issuer and the issuer’s redemption policy
Poor practice included:
- Promoting cryptoassets that are unstable as being stable
- Not actively monitoring the stability of these cryptoassets or considering specialist reports by third parties on the weaknesses in the stability mechanism of the cryptoassets being promoted
- Promoting cryptoassets whose stability mechanism primarily relies on an algorithm or reserves of other cryptoassets as stable
What firms should do next
The FCA’s assessment highlights the importance of these rules in protecting consumers and maintaining the integrity of the financial system. Firms should consider this feedback and implement any required changes to make sure their practices meet the FCA’s expectations and improve consumer outcomes.
At Complyport, we understand the importance of adhering to the FCA’s set standards and we can help your firm by:
- Regulatory Guidance: helping you understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements;
- Thematic Reviews: reviewing your financial promotions and ensuring they meet the regulatory requirements and the regulator’s standards;
- Due Diligence: reviewing your CDD framework and providing resource for CDD support where required.
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