Pep Pods from Cummings Pepperdine
Pep Pods from Cummings Pepperdine
Pep Pod – financial promotions, the FCA gateway and the cryptoasset regime
In this Pep Pod, Claire Cummings and Ian Gobin talk about financial promotions, bringing you up to date with the latest changes and how they affect both crypto and non-crypto products
Cummings Pepperdine is a unique leading legal advisor on crypto and alternative assets, advising a large and diverse global client base and the only firm to provide a complete solution building on the three key areas of law, tax and FCA with legal underpinning at every point.
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CUMMINGS PEPPERDINE
PEP POD: IN CONVERSATION ABOUT FINANCIAL PROMOTIONS
Q: What is a financial promotion?
Excuse the citation of legislation, but the answer to this makes more sense when read in the whole.
The relevant part is section 21 of the Financial Services and Markets Act 2000 (known as FSMA).
This says a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or to engage in claims management activity unless the promotion has been made or approved by an authorised person or it is exempt.
It’s the approval part which matters here.
There are also exemptions to the financial promotion rules, but they aren’t that easy to squeeze into.
Q: What’s the current news that I need to know about?
This goes back to last year. In September 2023 the FCA said that it was going to introduce a gateway. This means that any firms that wants to approve financial promotions for an unauthorised person needs specific FCA permission, which it calls “‘Approver Permission”.
While it was first talked about a while ago, the gateway came into force this year, in February 2024.
Q: How do I get through the gateway?
There are different routes to take depending on whether you are already FCA authorised or not.
If you are, you need to apply for a variation of permission, of VOP, which includes submitting the new Approver Person form.
If you are making an application for the first time, you need to include Approver Permission in your FCA application.
Q: What are the four main areas which the FCA will scrutinise in an Approver Permission application?
As with any application, the FCA wants to see that you really know what you are doing and how to do it. With Approver Permission there are certain areas on which to concentrate, and we see them fall, broadly, into four areas.
These four areas are:
- Background on the firm – give details about the types of promotion your firm intends to approve (including how many and marketing restrictions where applicable);
- Background on the people – the expertise that you have to approve promotions (including expertise ie professional qualifications or work experience);
- In practice – you will need to have ready all the policies, systems and controls that you will need to have in place. These include policies to ensure that all financial promotions you approve will be clear, fair and not misleading and comply with applicable financial promotion rules, your ability to withdraw approval and details of how you will monitor approved financial promotions on an on-going basis; and
- Past Performance – give details of your historic approvals, (including any approvals you've given over the past 12 months and say whether have they potentially caused harm.
Q: Does any of this apply to social media?
Yes. Absolutely yes. The FCA takes this very seriously and it has looked at LinkedIn posts which have breached the rules.
You need to be really careful about what you post about yourself, as the rules apply to a firm making its own financial promotion after all.
And be careful about what you re-post, as this may need Approver Permission.
As a general rule, make sure your compliance policies deal with all social media activities and think about them as you would a print newspaper. Would you take your scissors, cut a bit out and send it to people without compliance approval? Probably not and the same applies to social media, which is even easier to use to spread the word.
The FCA has also published, financial guidance on financial promotions in social media this year. It’s called FG24/1 and it’s online here
Not only this, but last year the FCA updated its form for reporting misleading financial promotion. Another sign of the significance the FCA places on financial promotions.
Q: Is all of this for non-crypto assets?
Yes it is. All regulated investment activities with regulated investment types fall within section 21.
Q: Does that mean that cryptoassets are not caught by the financial promotion rules?
No, not at all. Cryptoassets are included, but it does become a bit more complicated. And remember this applies to your own financial promotions as well as any which you want to approve as a firm with Approver Permission.
You need to work out whether your cryptoasset falls into the definition of “qualifying cryptoassets”. In short, these include unregulated tokens (Bitcoin and Ethereum are included) and regulated tokens as well as any cryptoassets that are fungible and transferable.
Transferable means, broadly, that the cryptoasset either confers a transferable right, or a communication made in relation to the cryptoasset describes it as being transferable or conferring transferable rights. Also excluded are cryptoassets that cannot be transferred or sold in exchange for money or other cryptoassets, except by way of redemption with the issuer, and can only be used in a limited way.
This all gets quite complicated and legal advice is going to be needed.
Q: What about NFTs? Are they qualifying cryptoassets?
In general, no. If the NFT is not a financial products the financial promotion rules won’t apply. Examples are NFTs and supermarket customer loyalty schemes on a closed DLT.
But again, it’s complicated. So it’s best to take legal advice
Q: So how can I get my financial promotion for qualifying cryptoassets properly approved?
Back to the idea of four categories. Here are the four ways in which cryptoasset financial promotions can be lawfully communicated if:
- it is communicated by an FCA authorised person (note that this doesn’t include firms which are authorised under the EMRs or PSRs);
- if it is made by an unauthorised person, it has been approved by an FCA-authorised person with Approver Permission;
- it is communicated by a cryptoasset business registered with the FCA under the Fifth Money Laundering Regulations, noting that Approver Permission is not include in these rules; and/or
- it complies with the conditions of an exemption.
Q: I’m not in the UK. Do I still need to get my financial promotion for qualifying cryptoassets properly approved in the UK?
Yes, because if your financial promotion has effect in the UK it falls into UK legislation. It applies to any promotion that “is capable of having an effect in the UK.” This includes any communication, including a website or app, that a person in the UK can access, regardless of where the website or app is hosted.
Financial promotions do not need to be specifically directed at UK consumers to be capable of having effect in the UK. If a UK consumer can access and respond to cryptoasset promotions to engage in the cryptoasset activities, such as through websites, apps and/or social media, it is likely that those promotions will be capable of having an effect in the UK. This applies regardless of the location of the firm making the promotion or who it was aimed at primarily.
Q: Are the FCA or HM Treasury working on anything else?
They certainly are.
The FCA is looking at its rules for high-risk investment promotions and the marketing of cryptoassets. Expect this to continue
And also expect HM Treasury to continue considering the eligibility thresholds for high net worth individuals and self-certified sophisticated investors and looking at scope of the exemptions that were amended on 27 March 2024.
CUMMINGS PEPPERDINE
September 2024
