Tougher Marketing Rules For FinTech Investments In The UK

The Financial Conduct Authority is consulting on tougher rules for the marketing of 'fintech' investments, including investment based‑crowdfunding, peer‑to‑peer (P2P) lending, other 'non‑readily realisable securities', non‑mainstream pooled investments (similar to unlisted investment funds) and speculative illiquid securities, as well as cryptoassets (when proposed Treasury regulations bring them within the financial promotions regime). The consultation ends on 23 March 2022. Firms will have 3 months to comply from publication of the final rules (cryptoasset changes will apply from the date when the Treasury changes apply). Based on experience in the P2P lending sector, the impact is likely to be severe, effectively restricting consumers to bank deposits and expensive listed instruments while shielding incumbent banks and investment firms from competition.

Classification of high‑risk investments.

The FCA intends to divide its rules into those that apply to ‘Restricted Mass Market Investments’ and those that apply to ‘Non‑Mass Market Investments.’ They have not yet applied their Speculative Illiquid Securities rules but may do so later in 2022. 

Consumer journey 

The FCA proposes to strengthen risk warnings and appropriateness tests, ban inducements to invest, introduce positive 'friction' in the investment process to give consumers a chance to reconsider their commitment and 'improve' the classification of different types of clients. 

The role of firms approving and communicating financial promotions

There will be a regulated 'section 21 gateway' for firms who approve financial promotions to ensure those firms have relevant expertise in the promotions they approve and that the quality of financial promotions is high. 

Qualifying cryptoassets

The Treasury is still considering its definition of cryptoassets for these purposes, but has indicated that a ‘qualifying cryptoasset’ for UK financial marketing rules will be "any cryptographically secured digital representation of value or contractual rights which is fungible and transferable," excluding otherwise regulated investments, e-money and fiat money, Non-fungible tokens (NFTs) and tokens that operate like gift cards/vouchers with 'one or more vendors or merchants in payment for goods or services'.

The FCA intends to generally apply the same rules to cryptoassets as currently apply to ‘Restricted Mass Market Investments’ (Non‑Readily Realisable Securities and Peer‑to‑Peer lending agreements), but would not allow ‘Direct Offer’ Financial Promotions of qualifying cryptoassets to be made to self‑certified sophisticated investors. New rules aside, financial promotions relating to cryptoassets will also need to comply with existing financial promotion rules, including the requirements for the promotion to be clear, fair and not misleading.

Controlled activities

The UK regulations (Financial Promotion Order) specifies a series of 'controlled activities' that are the main business of firms who deal in 'controlled investments'. Of those activities the government considers that only some are relevant to qualifying cryptoassets and most associated with misleading cryptoasset promotions seen by the FCA:

• dealing in securities and contractually based investments;
• arranging deals in investments;
• managing investments;
• advising on investments;
• agreeing to carry on specified kinds of activity.

The government had considered whether to add to this list activities relating to the provision of cryptoasset exchanges, cryptoasset ATMs, 'airdrops'; as well as cryptoasset lending (where firms take cryptoasset ‘deposits’ and pay ‘interest’ from the income received from cryptoasset borrowers); and 'DeFi platforms' (decentralised apps or 'dapps' which are not controlled by a central authority and use a series of smart contracts to automate peer-to-peer lending, peer-to-contract lending, borrowing or trading with financial instruments on a permissionless network, e.g. to enable users to earn interest on their tokens by connecting token holders to other borrowers). However, the government believes these activities could well be covered by the above set of controlled activities - so it is not to say those activities are exempt merely because they are not specified. 

In addition, the exemptions that currently only apply to activities relating to insurance and deposit taking; and marketing unlisted securities to certified high net worth individuals and self-certified sophisticated investors will not apply to qualifying cryptoassets.

Impact

The FCA's clear intention is to dampen enthusiasm for certain investments, particularly cryptoassets, among investors who don't understand what they are investing in and/or cannot afford to lose the amount they invest. The FCA explains it this way:

A key part of the strategy is addressing the harm from consumers investing in high‑risk investments that do not match their risk tolerance. This can lead to unexpected and significant losses for consumers and undermine wider confidence in investments, making it harder for all firms to raise capital. We do not want to unnecessarily restrict consumers who want to invest, but we want them to be able to access and identify investments that suit their circumstances and attitude to risk.

As ever, the concern must be that regulated firms and consumers facing these hurdles will be shut out of the markets for innovative products (as has happened with P2P lending). That would leave consumers with low return savings accounts and 'safe' listed products that have both high fees and low returns; and favour incumbent banks and investment firms over new market entrants.

In the UK, at least, there does not seem to be any middle ground... rather like our politics.