Time's Up: Extensions End For Compliance With FCA Crypto Promotion Rules

January 9, 2024
Following a three-month extension that was offered to eligible firms, all of the UK’s new crypto-asset promotions rules are now live, requiring customer action to continue using crypto services.

Following a three-month extension that was offered to eligible firms, all of the UK’s new crypto-asset promotions rules are now live, requiring customer action to continue using crypto services.

On Monday (January 8), the final deadline for compliance with the Financial Conduct Authority’s (FCA) crypto-asset promotion rules came into effect.

Last September, as covered by Vixio, the FCA postponed the deadline for certain firms to comply with four of the most “challenging” of the promotion rules.

This came in response to feedback from firms which said that compliance with the four rules would require complex “back-end” changes.

The four requirements in question are: personalised risk warnings; 24-hour cooling-off periods; client categorisation; and appropriateness assessments.

The deadline extensions were not open to all firms, however. Only those registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLRs) 2017, or other authorisation, could apply for a “modification” order.

If the modification order was granted, the firm was given an extra three months to comply.

Customer action required

Over the past few weeks, many of the largest crypto firms in the UK have informed customers of new tasks that must be completed in order to keep using their services.

These are the appropriateness assessments and client categorisations mentioned above, and until customers complete them successfully, they will be unable to open new crypto-assets positions.

In an email to customers seen by Vixio, eToro wrote that the appropriateness assessment is designed to assess each customer’s knowledge of the crypto-asset market and its risks.

The assessment includes a series of statements (some true, some false) covering the key dangers of crypto-asset products (volatility, cyber risks, scams, hacking, etc.).

The assessment also covers the potential for complete loss of investment capital, liquidity risks, lack of investor protection and the importance of diversification.

Customers are required to select all statements that are true to proceed. However, if the customer fails the assessment, they can retake it immediately.

Subsequent failure will result in a 24-hour lockout, after which the customer will be able to retake the assessment no more than once every 24 hours.

“Persistent failure may result in a further restriction whereby you will then only be able to retake the assessment every seven days,” eToro adds.

For the client categorisation test, customers are required to self-declare as either a “High-Net-Worth” Investor or as a “Restricted” Investor.

Customers will be required to provide this self-declaration every 12 months on the anniversary of the initial declaration.

Vixio has reviewed similar emails to customers from both Coinbase and Crypto.com. Coinbase is registered with the FCA as an e-money institution (EMI), while Crypto.com is registered with the FCA as a crypto-asset business under the holding company FORIS DAX UK.

A Coinbase spokesperson told Vixio: “We are requesting additional information from UK users in order to ensure that we are meeting UK investor protection standards, which require our users to have the necessary knowledge to make informed investment decisions.

“This process is also part of Coinbase’s commitment to working collaboratively with local regulators so that we can best serve our users now and in the future.”

An effective precaution or FCA window dressing?

David Rodriguez, associate director of UK-based consultancy Cosegic, said the new assessments may look like “window dressing” on the surface, but they are an improvement to “business as usual”.

“I can also see less crypto-savvy customers abandoning the onboarding process if they feel uncomfortable with the information required, or if they feel anxious about the assessment or unprepared for it,” he told Vixio.

“In this sense, it will be interesting to see the potential adverse commercial effects of this new level of friction in the customer journey.”

Should those who answer the assessment fail, firms will also see a reduction in would-be activity, at least while the customer remains locked out of the platform.

Rodriguez said that he has experimented with the appropriate assessments and found the difficulty level to be fairly high.

“From my experience in responding, I can tell you that, even as a ‘restricted investor’ you need to have some awareness of crypto and the implicit risks involved to be able to pass the test,” he said.

“Therefore, although not a perfect solution, I do think the new requirements help to mitigate consumer protection risks (and firms seem to be collaborating here as much as they can).

“Ultimately, the customer will always be exposed to scams and cyber risks, but at least these risks are now formally communicated to customers.”

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