As of 8 October 2023, new Financial Promotion Rules (FPR) come into effect. This was one of the biggest changes in the UK’s relatively short crypto history as it altered how crypto assets are marketed to UK consumers. 

These regulations, which are now being orchestrated by the Financial Conduct Authority (FCA), are designed to protect investors while keeping the door open to growth in the crypto market. The new rules ultimately put crypto assets into a category of Restricted Mass Market Investments (RMMI). This means stringent requirements for both UK-based and overseas firms…

This article will look at the intricacies of investor categorisation for crypto in the UK because it’s become a central component to remaining compliant. We will look at the different investor types, the implications this has for crypto exchanges as well as the broader regulatory context. 

What is Investor Categorisation? 

Investor categorisation is a not-so-new piece of regulatory framework that is designed to classify investors based on their financial knowledge, experience and risk tolerance. In the context of crypto assets in the UK, this system has been implemented as a key part of the new Financial Promotion Rules which ensure appropriate protections for different types of investors.

Ultimately, the Financial Promotion Rules are a way to make sure that consumers - many of whom are still new to crypto and new to investing - are not exploited. In order to protect them from being marketed aggressively, one move has been to categorise them so that some receive greater levels of protection than others.

The FCA is the UK's main financial regulatory body, so it has played the leading role in implementing these rules. The primary purpose of investor categorisation is to determine the level of protection and access an individual should have when investing in high-risk products. Crypto, of course, now comes under this.

The timeline for implementation of these rules was worth paying attention to. Following the FCA's Policy Statement PS26/6 published on 8 June 2023, a four-month transition period was established. This resulted in the full enforcement of the new regulations on 8 October 2023.

For UK crypto investors, this categorisation system is greatly important. It determines not only the types of crypto investments they can access but also the level of risk warnings and assessments they must undergo. More friction is now in place, and some benefits like refer-a-friend bonuses are now taken away.

But of course, it’s more important to pay attention as an exchange or crypto entrepreneur, because there’s a lot at stake. Noncompliance results in fines and other punishments, while compliance now takes greater resources and astute marketing practices.

Under these new rules, crypto assets are classified as Restricted Mass Market Investments (RMMI). This classification brings with it its own set of restrictions on how these assets can be marketed to UK consumers. These include 

• Clear risk warnings
• Bans on investment incentives
• Introduction of 'positive frictions'---deliberate obstacles in the investment process designed to encourage more thoughtful decision-making

The categorisation system isn’t easy—it doesn’t manifest outside of the firm’s four walls, either. It requires firms to conduct their own appropriateness assessments and adhere to strict client categorisation requirements. This means that investors are only presented with opportunities that align with their financial sophistication and risk tolerance.

The Three 'Investor Types' 

Under the new Financial Promotion Rules in the UK, crypto investors are categorised into three main types 

• Restricted investors
• High net worth investors
• Certified sophisticated investors

Each category has specific criteria and implications for crypto investments.

Restricted Investor

A Restricted Investor is most often a retail investor with limited income or assets. As of October 2023, this category includes individuals who agree not to invest more than 10% of their net assets in high-risk investments like crypto. This limit aims to protect investors from overexposure to volatile markets. You can think of retail investors as everyday people with their own careers, but invest non-professionally, either for fun or for their own retirement.

Key points for Restricted Investors:

• Must declare they will not invest more than 10% of their net assets in high-risk investments
• Subject to the most stringent protections and restrictions
• May face limitations on the types of crypto products they can access

High Net Worth Investor

The criteria for High Net Worth Investors has more recently been updated (end of January 2024). To qualify, an individual must now meet one of the following criteria

• Annual income of at least £170,000 in the last financial year (increased from £100,000)
• Net assets of at least £430,000 throughout the last financial year (increased from £250,000)

The point of the High Net Worth Investor category is that they are considered to have the financial capacity to bear potential losses from high-risk investments, i.e. a way to differentiate from someone losing money that they don’t have. They may have access to a broader range of crypto investment opportunities but are still subject to certain protections.

Certified Sophisticated Investor

This category is for individuals with significant investment experience or knowledge. The criteria for Certified Sophisticated Investors have also been recently updated. To qualify, an individual must meet at least one of the following

• Be a member of a network or syndicate of business angels for at least six months
• Have worked in private equity or in the provision of finance for SMEs
• Have been a director of a company with an annual turnover of at least £1.6 million within the last two years (increased from £1 million)

Certified Sophisticated Investors are presumed to have a good understanding of the risks associated with crypto investments. Unlike HNW investors, it’s not about money, but knowledge. They may have the most flexibility in terms of access to crypto products and services as a result.

It's important to note that these categories are not just mere labels. Instead, they determine the level of access and protection an investor receives in the crypto market. Exchanges and other crypto service providers must really go to great lengths to ensure they categorise their clients correctly. And, as a result, provide the appropriate levels of information and safeguards based on said categories.

This isn’t to say the onus is 100% on the companies. Investors too should be aware that their categorisation may affect their ability to invest in certain crypto products or use specific services on exchanges. It’s important for individuals to understand their own investor type because they can then gauge their own level of protection that they’re receiving.

The Implications for Crypto Exchanges 

The new Financial Promotion Rules, of course, have significant implications for crypto exchanges operating in the UK—and on those outside the UK that target UK customers.

One of the most important changes introduced was the requirement for exchanges to now implement new compliance measures—and it’s quite a big overhaul. All firms marketing cryptoassets to UK consumers must be authorised or registered by the FCA. If not, they must have their marketing approved by an authorised firm—these are the only two options. This applies regardless of whether the exchange is based in the UK or overseas, ensuring a level playing field for all operators in the UK market. After all, it’s the customer that is at the core.

The user onboarding process has undergone some big changes as mentioned earlier with the categorisations. Existing users are also affected by these changes as exchanges need to re-categorise their clients every 12 months if they wish to continue making direct offer financial promotions. This ongoing requirement ensures that investor classifications remain up-to-date and relevant.

The new rules have led to potential limitations on services offered. Exchanges must now conduct appropriateness assessments before allowing clients to respond to direct offer financial promotions. This may restrict some users' access to certain crypto products or services based on their knowledge and experience.

Coinbase

A prime example of how exchanges are adapting to these new requirements is the case of Coinbase. The exchange introduced a risk acknowledgement form for UK users, which includes an appropriateness assessment. This form asks users about their investment knowledge and experience, ensuring they understand the risks associated with crypto investments.

The Coinbase risk acknowledgement process has faced some challenges and user reactions, though. Some users have reported difficulties in completing the form, particularly in understanding the technical questions about crypto investments. This may mean the new frictions are working, but it may also highlight the potential hurdles in implementing these new regulatory requirements while maintaining a user-friendly experience.

Compared to other exchanges, Coinbase's approach appears to be more comprehensive. But, there is an issue of sharing answers online which completely undermines the validity of these tests unless the answers are shuffled. 

A Change in Marketing Strategy

It’s not just about how well an exchange implements what is asked of them, and in a user-friendly way. These are reactive, after all. 

A lot of the other reactive marketing techniques that are favoured among tech firms are in trouble, too. They can’t rely on refer-a-friend now either, as these are clamped down on, as well as the 24-hour cooling-off period. Lead-generating techniques such as pay-per-click and bottom-of-funnel activities are now in trouble. Chasing leads through metrics and converting them with persuasive copy is now tricky because of all these new rules, no less the risk warnings.

Crypto exchanges may now look at creating demand-generative marketing instead. These focus on awareness and interest, but also on being a thought leader in the space. Education (i.e. holding webinars and having blog posts) is a key part of demand-gen marketing as you position yourself as a voice within the industry. It just so happens that these align nicely with the regulations.

Demand generative marketing also benefits from a longer-term approach in which sign-up friction is naturally reduced (because they’ve built up interest in you), rather than forcibly reduced (through offering sign-up bonuses). It keeps the FCA happy, yet it can have a more ambitious goal of brand awareness and brand storytelling, too.

Navigating the Categorisation Process as an Investor 

Here's a step-by-step guide to successfully tackling the responsibility of categorisation as an investor. This can also be important for crypto exchanges to understand and empathise with, as to understand the customer journey.

1. Understand the three investor categories: Restricted, High Net Worth, and Certified Sophisticated
2. Assess your financial situation and investment experience to determine which category you might fall into
3. Prepare necessary documentation to support your categorisation (e.g. income statements for High Net Worth investors)
4. Complete the self-categorisation questionnaire provided by your chosen crypto platform
5. Be prepared to undergo an appropriateness assessment, regardless of your category

Common Pitfalls to Avoid Include

• Overestimating your investment knowledge or experience
• Underestimating the risks associated with crypto investments
• Rushing through the categorisation process without careful consideration
• Not being honest in the self-assessment
• Not taking enough time to answer each question in the appropriateness test

Conclusion 

The UK's crypto regulatory framework seems to be changing each year. But, the latest updates were significant enough to resemble some sort of equilibrium for the time being. 

By implementing investor categorisation, appropriateness assessments and stricter rules for exchanges, the UK is trying to keep customers safe. Innovation is still possible, but friction is being introduced to ensure the customer isn’t rushed into any mistakes.

For exchanges, these frictions should be embraced by pivoting to a more patient marketing strategy that puts thought leadership and education at the centre. At Englebert, we can help approve your marketing promotions if you’re not authorised.

For investors and businesses in the crypto space, staying informed about these regulatory changes is needed because the technology is growing ever more complicated—and the stakes just keep getting bigger.