Ramparts appoints Ravi Viroomal as Business Development Director
Ramparts, a leading Gibraltar law firm and fiduciary group business, today announced the appointment of Ravi Viroomal as Business Development Director.
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The new UK financial services promotion regime comes into force next month and makes unregulated promotions of cryptoassets illegal. It affects many businesses worldwide including VASPs, affiliates, advertisers and payment companies.
The FCA has sent a number of warning letters reminding relevant cryptoasset businesses of the new regime and the criminal offence, punishable by an unlimited fine and up to 2 years imprisonment. The UK regime applies to all relevant cryptoasset businesses worldwide in respect of UK customers or promotions capable of having an effect in the UK. It also impacts service providers such as advertisers, social media platforms and payments companies.
In the UK a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless:
From 8 October 2023, cryptoasset businesses that wish to offer or market cryptoassets to UK customers will need to be registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to rely on an exemption in the FPO unless their financial promotions are approved by an authorised person or are otherwise lawful.
Breach of the financial promotion restriction is a criminal offence, and it may not be possible to enforce an agreement against a person who entered into it as a result of an unlawful financial promotion.
It is notable that, unlike other types of financial promotion, there is no exemption from the cryptoasset restriction for promotions to high-net-worth individuals and self-certified sophisticated investors. Firms seeking to properly categorise their clients must do so carefully to ensure they do not promote to retail customers.
The regime also impacts service providers such as payment companies and social media companies and advertisers to ensure that illegal financial promotions are not communicated to UK consumers by unregistered cryptoasset firms. In addition, the regime extends to persons who intermediate financial promotions or engage in controlled activities (such as advisors, and persons arranging investments in cryptoassets).
Service providers risk committing money laundering offences under the Proceeds of Crime Act 2002 (POCA) if they support unregistered cryptoasset firms in making financial promotions or undertaking unlawful activity:
“Unregistered cryptoasset firms do not operate in isolation. They are supported and facilitated by a host of intermediaries who play a critical role in enabling these firms to target UK consumers. For example:
• Social media platforms and search engines enable ads to be targeted at UK consumers.
• App stores and domain name registrars host apps and websites, which are often the main form of communication with UK consumers.
• Payments firms enable consumers to invest money with these firms.
All these intermediaries have a crucial role to play in protecting UK consumers from illegal promotions. We expect these firms to play their part in ensuring that illegal financial promotions are not communicated to UK consumers by unregistered cryptoasset firms.” (FCA Final Warning Letter)
In addition, if your business model involves receiving economic benefits to encourage persons to invest in crypto assets (I note that there are many persons using affiliate links on social media platforms including X and Youtube) then you can also be caught even if you are not directly providing the cryptoasset custody or investment service:
“A hypertext link may or may not be a financial promotion in itself. This will depend on the nature of the hypertext link and the context in which it is placed. However, taken in isolation, a hypertext link which is purely the name or logo of the destination will not be a financial promotion in its own right. More sophisticated links, such as banners or changeable text, may be financial promotions. This will depend upon the facts in each case.
…In some cases, however, the operator (‘O’) of a website which hosts a link to another website, may be causing the communication of a financial promotion on that other website. This will only arise when O has made arrangements with the operator of the other website under which O is to procure users of his site to access the link provided with a view to their engaging in investment activity.” (FCA – PERG, 8.22)
The cryptoasset restriction applies only to cryptoassets that are both fungible and transferable (such as tokens and cryptocurrencies). It does not extend to non-fungible tokens or e-money. NFTs are currently treated as collectibles rather than financial investments.
Cryptoassets that meet the criteria of one of the other types of controlled investment, or electronic money or fiat currency will not constitute qualifying cryptoassets.
Cryptoassets that can only be used in a limited way are also excluded – the criteria are in line with those of the limited network exclusion that applies in relation to payment services.
The new rules are contained in PS23/6: Financial promotion rules for cryptoassets.
The FCA has also published a Guidance Consultation (GC23/1) for cryptoasset financial promotions.
The regime applies to financial promotions that are capable of having an effect in the UK.
Financial promotions are unlikely to be considered to be fair, clear and not misleading unless an offer or promotion sets out with sufficient clarity and prominence the:
Anyone who communicates a financial promotion for a cryptoasset should have sufficient evidence, and carry out due diligence, on the substance of a promotion and underlying cryptoasset before communicating it to accurately disclose risks to consumers in a way that is fair, clear and not misleading.
A firm may need to consider (amongst other things):
The financial promotions regime will apply to all firms marketing cryptoassets to UK consumers regardless of whether the firm is based overseas or what technology is used to make the promotion.
The FCA has recently signalled that it will consider giving cryptoasset firms more time to implement certain changes, for instance, a 24-hour cooling-off period. Firms could be given until 8 January 2024 to introduce features that require greater technical development, with the core rules still coming into effect from 8 October 2023.
Financial incentives to purchase cryptoassets (including refer-a-friend bonuses) will be unlawful. The FCA rules do however clarify when an intrinsic benefit is permissible:
“We wish to clarify that we would not consider benefits that are intrinsic to the cryptoasset or exclusively bound up with its function and/or business model to be considered an ‘incentive’. This might include features or benefits that are part of the terms and conditions associated with a particular cryptoasset. For example, cryptoassets that serve to provide the owner with voting rights, and which are used for the purpose of establishing governance arrangements for a particular platform or project would not be considered an incentive.”
There are now only 4 routes to legally promoting cryptoassets to consumers:
MLR-registered cryptoasset businesses must carefully consider the scope of Article 73ZA and explicitly identify the entity within the group responsible for promoting cryptoassets to UK consumers:
The UK recently introduced a new financial services Consumer Duty. This sets very high standards for retail consumer protection across financial services and requires firms to put their customers’ needs first.
The Duty consists of several features and rules related to ensuring that based on: products and services, price and value, consumer understanding, and consumer support.
The FCA have not (yet) extended the new Consumer Duty regime to firms registered under CARR though it does apply to authorised firms that make or approve financial promotions of cryptoassets.
The Consumer Duty regime will be brought fully into scope once there is a full authorisation regime in the UK for cryptoasset service providers.
interestingly, PS23/6 does not suggest that an overseas business is prohibited from being able to promote crypto assets as long as it is registered under the MLRs (i.e. rely upon 73ZA). Indeed, the Policy document might suggest overseas firms will not be precluded from doing so as long as it is a level playing field:
“Our rules will help achieve a level playing field and prevent overseas firms, who may be currently subject to fewer regulatory standards, from undercutting UK firms with misleading advertising.” (1.22)
“Our financial promotions rules are focused on ensuring UK consumers remain protected from misleading financial promotions, from both UK and overseas firms.” (6.51)
However, the FCA has made it clear that they expect a UK presence for those wishing to apply under the UK MLRs and the UK Cryptoasset AML registration regime (CARR) :
“cryptoasset businesses to be ready, willing and organised at the point of their application. This includes having a bona fide UK presence as per Regulations 8 and 9.”
The MLRs provide the following definition of carrying on business in the UK as is required to register under CARR:
“9.—(1) For the purposes of these Regulations, a relevant person (“A”) is to be regarded as carrying on business in the United Kingdom in the cases described in this regulation even if A would not otherwise be regarded as doing so.
…The second case is where—
- A’s registered office (or if A does not have a registered office, A’s head office) is in the United Kingdom; and
- the day-to-day management of the carrying on of A’s business is the responsibility of—
(i) that office, or
(ii) another establishment maintained by A in the United Kingdom.”
Notably, the MLRs do not assist us with the meanings of ‘registered office’, ‘head office’ or ‘day-to-day management’ so we must consider other legislation and guidance. This area of law is primarily derived from tax law which is itself not always defined in legislation.
In any event, the financial promotion route for AML-registered entities will likely require a UK company or a desire for a foreign company to be deemed to be a UK company for regulatory purposes.
It is not therefore clear how useful the current FCA flow-chart is in determining whether a person is carrying on business in the UK for the purposes of making a registration. The flowchart suggests a wider test of UK nexus than the narrower test in the MLRs which the FCA now appear to be stating is the relevant test.
Given the UK presence requirements: it could be hard to argue that a foreign registered company was doing business in the UK for registration under the MLRs and yet not be UK tax resident on worldwide income or not established in the UK for VAT purposes.
Under the basic rules of UK corporate residence, a company is UK tax resident (in respect of its worldwide activities) if it is incorporated in the UK, or if its central management and control is in the UK.
For VAT purposes, a head office is usually considered a business establishment with a degree of permanence. It is where the functions of the business’s central administration are carried out, with sufficient support to deliver services (from a technical and human resources perspective).
We, therefore, expect firms to apply for registration under CARR and the MLRs using a UK company. It is unclear whether a branch registration of an overseas company would be permissible under CARR.
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