The Financial Conduct Authority (FCA) of UK, announced a regulatory change intended to ensure that individuals buying crypto products understand the risks involved. Effective 8 October, crypto firms are being brought within the scope of rules that regulate the marketing of financial products in the UK.Companies that market crypto assets to UK consumers should be aware of these rules, which include, but are not limited to:

  • A requirement to introduce a cooling off period for first-time investors
  • A ban on ‘refer a friend’ bonuses

Failing to comply with the FCA’s rules could be considered a breach, which may be viewed as a criminal offence and punishable by up to two years’ imprisonment, an unlimited fine, or both.

Broader regulatory frameworks emerging

The FCA’s new regulation comes as a welcome clarification of what is expected of companies that market crypto assets. Importantly, the regulation applies to both registered firms based in the UK and international firms targeting UK businesses and consumers, and applies regardless of what technologies are being used to promote crypto assets.

The rule aims to help those marketing financial products avoid misleading clients. It also falls under the FCA’s wider, three core commitments to:

  • Reduce and prevent serious harm
  • Set and test higher standards
  • Promote competition and positive change

The FCA’s announcement also comes just months after the EU announced the Markets in Crypto Assets regulation (MiCA), a standardisation of its regulations for crypto assets which established a new ‘uniform legal framework for crypto-asset markets in the EU’. The hope of the new FCA regulation is that it will provide the same safeguards and clarity as MiCA, portions of which will take effect in 2024 and 2025.

Due to the constantly evolving crypto market, the UK regulation has been developed ‘parallel to the market’. The FCA’s new rule is timely, coming as more people invest in crypto assets: a recent study by the FCA found that almost 10% of UK adults held crypto assets as of August 2022, compared to 4.4% as of 2021.

Protecting directors and officers

Directors, officers, and the companies they run must understand the new regulation and its impact on their business activities. The FCA’s hope is that clear regulation will accelerate the adoption of best practices across the industry.

But with evolving regulation comes new risks. It is imperative that companies marketing crypto assets within the UK follow the new regulation closely given the severe penalty that any breach may bring.

Given the FCA’s new guidance, firms will need to establish strong risk management controls and clear processes incorporating the FCA guidance. Among other actions, organisations should update their risk frameworks for both appetite and tolerance. This includes examining their insurance programmes to ensure that they remain fit for purpose, especially for directors and officers who may need defence or investigation cover if regulators believe they have misstepped.

Directors’ and officers’ liability (D&O) insurance for companies operating in the digital asset ecosystem can provide coverage for defence costs involved with regulatory enforcement actions. At times, D&O policies can also provide coverage for costs associated with responding to regulatory investigations, though any resultant fines and penalties may be uninsurable at law.

The breadth of D&O coverage can vary significantly from company to company. However, those insureds that can demonstrate that they have professional and engaged boards along with strong compliance and corporate governance measures in place tend to benefit from broader insurance coverage offerings.

Now is the time for UK-based firms and those firms targeting UK consumers to ensure that their risk management protocols are up to date and to review their D&O arrangements to ensure that they address the needs of an FCA-regulated firm.

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