Following the latest press release of the Financial Conduct Authority ("the FCA" or "the British Regulator"), the British regulator considers the crypto-derivatives to be ill-fitted for retail customers due to the harm they pose. The rationale behind the forthcoming ban is pointed to the following areas:
No reliable basis for valuation;
Existence of market abuse and financial crime in the secondary market;
Extreme volatility; and
Inadequate understanding and a lack of clear investment need.
Thus, according to FCA, if your firm carries out marketing, distribution or selling activities regarding any derivative (CFDs, options, futures and ETNs - Exchange Traded Notes) that reference to unregulated transferable cryptoassets in, or from, the UK, to retail clients, you are required to cease these activities by 6 January 2021.
Retail consumers, however, with existing holdings can remain invested following the prohibition, until they choose to disinvest. There is no time limit on this, and the FCA does not require or expect firms to close out retail consumers’ positions unless consumers ask for this.
To further support the decision, the British regulator estimated that retail customers will save around £53m from the ban of these products.
The rules will not apply to EEA firms unless they have temporary permission, are in the financial services contracts regime as a supervised run-off firm, are a contractual run-off firm, or they have a Part 4A permission.
As a result of the changes, EEA firms operating outside the temporary regimes will be treated in the same way as third country firms. This is due to changes being made to the glossary terms used in the application provisions. The rules will apply to temporary permission firms, supervised run-off firms and contractual run-off firms.
For the avoidance of doubt, in COBS 22.6.1R page 48, “marketing” includes communicating and/or approving financial promotions, and “distribution or sale” includes dealing in relation to cryptoasset derivatives and cryptoasset exchange traded notes.
Prohibitions 22.6.5 R (1) - please see page 49 of the Policy Statement PS20/10
A firm must not:
sell a cryptoasset derivative or a cryptoasset exchange traded note to a retail client; or
distribute a cryptoasset derivative or a cryptoasset exchange traded note to a retail client; or
market a cryptoasset derivative or a cryptoasset exchange traded note if the marketing is addressed to or disseminated in such a way that it is likely to be received by a retail client.
“Marketing” includes, but is not limited to, communicating and/or approving financial promotions.
If you have any questions, do not hesitate to contact us.
Written by Constantinos Constantinides, Director of FAI Comply