The Financial Conduct Authority has outlined proposals that will force companies to provide much more prominent warnings on high-risk investment products such as cryptocurrencies, as well as change investor declarations and ban incentives to invest to help prevent retail investors from investing in inappropriate assets.
Lucy Gallagher, Senior Manager, Financial Services Advisory, at BDO, explains that the FCA’s proposals are going to be a huge challenge to cryptocurrency businesses and are likely to reduce their client bases dramatically, as consumers would only be able to respond to cryptoasset financial promotions if they are classed as restricted, high net worth or sophisticated investors.
The FCA also plans to ban incentives to invest, for example, new joiners or refer-a-friend bonuses.
Lucy Gallagher says: “This is a major shake-up in how crypto assets and other riskier investments will be advertised to the average investor. The FCA is more concerned than ever that retail investors are putting their hard-earned money into investments they don’t have the experience or knowledge to handle.”
“This is not the FCA stopping the advertising of these investments but ensuring that the businesses themselves play more of a role in identifying and weeding out investors who are out of their depth. The FCA wants to move away from an approach where investors can simply tick a box and have instant access to high-risk assets.”
“Providers of crypto assets and other types of high-risk investment will be hit with significant costs to upgrade their compliance controls and systems for onboarding new clients. They also need to revisit the way in which they categorise investors and this could cost them a lot of time and money to get right.”
The FCA says that one of the triggers for these changes is the huge rise in speculative investments that took place during COVID. In summary:
• The FCA wants to strengthen risk warnings, ban inducements to invest, introduce “positive frictions” to prevent consumers from investing in assets like cryptocurrencies so easily, change investor declarations and have stronger appropriateness tests.
• In line with yesterday’s proposal by the Treasury it plans to bring crypto assets under its financial promotion rules
On risk warnings, the FCA proposes changing them to the following: “Don’t invest unless you’re prepared to lose all your money invested. This is a high-risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2min to learn more.”
On positive frictions, it suggests a personalised risk warning pop up for first-time investors with a firm, and then a 24 hour cooling off period where they can’t receive any promotion or offer unless they re-confirm their request after the 24 hours is up.
On investor declarations, it plans to introduce an ‘evidence declaration’ whereby sophisticated, HNW or restricted investors have to provide evidence that they are indeed sophisticated, HNW or restricted investors.
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