What are the FCA's Marketing Rules on Crypto Incentives in the UK?

In a significant shift towards greater regulation of the crypto industry, the Financial Conduct Authority (FCA), the UK's financial watchdog, has recently introduced a series of stringent rules for marketing crypto in the UK.

These new regulations, which are set to pose fresh challenges for thousands of businesses, are designed to protect consumers and foster responsible growth within the crypto industry.

This article will break down the FCA crypto update and what it means for crypto projects looking to market themselves in the UK.

The New Rules

The FCA's new rules, which come into effect on 8 October 2023, are part of a package of measures designed to ensure that those who buy crypto understand the risks involved. The rules are as follows:

Cooling-off Period

Firms that are marketing cryptoassets to consumers in the UK will now need to have a cooling-off period for first-time investors. These new rules will force first-time investors to wait 24 hours between requesting to purchase cryptocurrency and actually being able to complete their purchase online. This rule is likely to target certain calls to action, such as “Buy Now” which are usually found in communications that promote or offer investment in cryptocurrencies.

In other words, they will be treated as DOFP (Direct Offer Financial Promotion) - and new customers will need to wait 24 hours until they’re shown a DOFP.

This is designed to protect new investors from making hasty decisions that could result in significant financial losses. The cooling-off period is a significant change in the marketing of cryptoassets, as it allows potential investors to take a step back and thoroughly consider their decision before investing.

Ban on Bonuses

The popular 'Refer a friend' bonuses, which were often considered deceptive, will be banned. For obvious reasons, this is deemed as too strong of an incentive for people to invest. However, offering “free” cryptoassets will also be included in this ban.

These bonuses have been a common marketing tactic used by many crypto firms to attract new investors. However, the FCA has deemed these bonuses as potentially misleading, leading to their prohibition. The new ban will shift how firms will compete with one another.

Knowledge and Experience

A big problem is that many crypto firms have been telling novices in crypto to invest. Now, crypto firms will have to ensure that appropriate knowledge and experience exists in their users. Or, rather, firms will need to assess whether the consumer has the necessary experience and knowledge to understand the risks involved with investing. This rule underscores the importance of investor education in the crypto industry, and it aims to prevent, like the ban on bonuses does, the luring in and exploitation of underinformed, novice investors. However, this one remains the most vague of all the new rules.

Clear Risk Warnings

Those promoting crypto must now also put in place clear risk warnings, much like the “x% of retail CFD accounts lose money” that appears on CFD broker review sites. When promoting crypto products or services, firms will soon have to include a risk warning. For example, “Don’t invest unless you’re prepared to lose all the money you invest”, or ‘Take 2 minutes to learn more.’ This rule is designed to ensure that potential investors are fully aware of the risks involved in investing in cryptoassets, but it may also tie into the previous rule too.

Clear, Fair and Not Misleading Adverts

The FCA requires that all adverts are clear, fair, and not misleading. This rule is intended to prevent firms from using deceptive or confusing language in their advertisements, ensuring that potential investors have a clear understanding of what they are investing in. For example, trying to dress up investments as a form of gamification without warning that capital is at risk.

These rules apply to all crypto firms targeting UK consumers, including those based overseas. This means overseas firms with UK websites and British sales funnels need to be vigilant in compliance. Failure to comply with these rules can result in stringent penalties, including up to 2 years of imprisonment, an unlimited fine, or both.

The Impact on Crypto Marketing

The new rules will undoubtedly have a significant impact on how cryptoassets are marketed in the UK. The ban on 'Refer a friend' bonuses and the introduction of a cooling-off period for first-time investors will require many firms to rethink their marketing strategies.

Currently, a key point of differentiation, like with sports betting firms, is one-upping each other in bonuses. Instead, firms will have to find more novel ways to differentiate, and those that rely on such marketing methods because they are running something similar to a pyramid scheme could finally face a dead end.

Moreover, the requirement for clear risk warnings and the need to ensure that investors have the appropriate knowledge and experience will place a greater onus on firms to provide comprehensive and transparent information about their products. This is seen as particularly important due to cryptoassets being in their infancy, and thus many are unfamiliar with the products and rely on such marketing methods as a source of information and learning.

The FCA's new rules also reflect a broader trend towards increased regulation of the crypto industry. As the popularity of cryptoassets continues to grow, so too does the need for robust regulatory frameworks that protect consumers and promote responsible growth within the industry. Ultimately, many companies head overseas because operations are subject to fewer regulations, which is why overseas marketing towards UK customers is now being targeted.

Conclusion

The FCA's new rules represent a significant shift in the regulation of crypto marketing in the UK. While they will pose new challenges for crypto firms, they also offer an opportunity for these firms to demonstrate their commitment to transparency, consumer protection, and responsible growth.

As the FCA’s Sheldon Mills said, “It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice.”

While the crypto industry remains a high-risk and largely unregulated market, these new rules are a step towards integrating the crypto economy within the mainstream financial system. As such, they represent a cautious but determined step towards the future of global finance. For firms that do not rely on detective and aggressive marketing tactics, the FCA law changes mark a step towards legitimacy and societal acceptance of their businesses.

If you’re looking for support in this unpredictably volatile regulatory environment, here at Englebert, we specialise in ongoing compliance monitoring along with promotions and communication support. Why not contact us today for more information?

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