On 7th August, the FCA released its quarterly data report on financial promotions (2024 Q2 quarterly data on financial promotions) which raised concerns regarding the compliance of cryptoasset firms’ partner firms and their compliance with the financial promotion regime. This follows the FCA’s recent publication on good and poor practices for the financial promotions rules applicable to cryptoassets (see our article on this here).
All this follows the obligation since October 2023, that all cryptoasset firms that communicate financial promotions must do so using any of the permitted routes under Section 21 of the Financial Services and Markets Act 2000 (FSMA). Failure to do so constitutes a criminal offence which can lead to up to two years imprisonment, an unlimited fine, or both.
What does the report state?
According to the quarterly report, although the FCA has taken note of the efforts of registered cryptoasset firms to comply with its rules, the FCA is worried about their partner firms and the lack of cryptoasset firms’ systems and controls, policies and procedures to oversee the partners’ compliance with the financial promotions rules. This is especially the case with cryptoasset firms operating a “widget” model”, where a registered cryptoasset firm provides fiat to crypto on/off ramp services to third-party firms (“partner firms”) via an API connection to integrate into the partner firm’s own website and applications.
As per the information published by the FCA, in most of the cases it has reviewed, the FCA has found that partner firms are communicating financial promotions in breach of section 21 FSMA. The majority of firms in breach of the requirements have been identified as non-custodial wallet providers. In particular, the FCA has identified that a large cryptoasset non-custodial wallet provider based overseas was illegally promoting cryptoasset investment activities including the fiat to crypto on/off ramp services to UK consumers through its website, apps and social media accounts. The promotions were considered to have effect in the UK and the partner firm had not implemented any controls to restrict UK consumers from accessing the services being promoted.
In this sense, it was found that the partner firm was not making its promotions through any of the four permitted routes under the regime:
- The promotion is communicated by an FCA authorised person;
- The promotion is made by an unauthorised person but approved by an FCA authorised person;
- The promotion is communicated by a cryptoasset business registered with the FCA under the MLRs; and
- The promotion complies with the conditions of an exemption in the Financial Promotion Order.
Subsequently, the FCA engaged with this firm and, after implementing the necessary corrective action, it is now complying with the financial promotions regime by engaging with an authorised firm to have its financial promotions approved.
What are the implications of the findings?
The FCA has indicated that it is concerned that UK-registered cryptoasset firms may be benefiting from the illegal promotions of their partners as they generate revenue and transactions fees for the registered firms. In this regard, registered firms are expected to consider and address the following points:
- Perform a comprehensive assessment of their own compliance against the financial promotion rules;
- Conduct a thorough review of their partner firms to determine whether the partners are compliant with section 21 FSMA;
- Review and implement ongoing monitoring procedures to detect potential breaches by partner firms of section 21 FSMA;
- Ensure that their partner firms understand that they need to comply with the financial promotion rules;
- Take action to mitigate the risks of continuing to provide services to a business partner, where the firm identifies a partner is in breach of section 21 FSMA;
- Strengthen due diligence on unregistered partner firms; and
- Proactively engage with partner firms such as requiring that their financial promotions are approved and/or placing restrictions on partners who do not remedy their breach of section 21 FSMA.
Whilst the FCA has been engaging directly with partner firms in breach of section 21 FSMA, registered cryptoasset firms are warned that there might be consequences for them if they don’t have adequate and proportionate policies and procedures and systems and controls to oversee the financial promotions of their partner firms. Any breaches will be treated as a criminal offence by the FCA and could lead to potential enforcement actions on registered cryptoasset firms. Firms are urged therefore to review their systems and controls in this regard, as a matter of priority.
Firms will, however, likely be at different stages in their maturity and, consequently, have different levels of compliance capacity and experience. Often, firms can supplement their own resources (and compliance) through engaging an external expert consultant, even if just looking at a single issue.
If you would like to find out more about how we could support your cryptoasset firm with your financial promotions framework and controls, you can contact us below.
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