6 October, 2020 - The UK's financial markets regulator, the Financial Conduct Authority (FCA), has this morning published a Policy Statement (PS20 / 10) "Prohibiting the sale to retail clients of investment products that reference cryptoassets".
The FCA states in its announcement this morning that, "We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products. We estimate a ban could reduce harm by £19m to £101m a year for retail investors."
The FCA states that it considers that "retail consumers cannot reliably assess the value and risks of derivatives and exchange traded notes that reference certain cryptoassets."
The policy document then lists the reasoning behind this view as stemming from the:
• nature of the underlying assets, which have no inherent value and so differ from other assets that have physical uses, promise future cash flows or are legally accepted as money
• presence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in cryptoasset markets
• extreme volatility in cryptoasset prices
• inadequate understanding of cryptoassets by retail consumers and the lack of a clear investment need for investment products referencing them
The rules will come into force on 6 January 2021 after the end of the transition period which has operated since the UK’s departure from the EU on 31 January 2020.
No new positions in Crypto asset derivatives are to be allowed after January 6th 2021. However, existing holdings can remain until the holder decides to disinvest, with no time limit.
The policy statement states that firms that "carry out marketing, distribution or selling activities in, or from, the UK of the relevant products to retail clients, ...are required to cease these activities by 6 January 2021."
The policy document confirms that, "Retail consumers with existing holdings can remain invested following the prohibition, until they choose to disinvest. There is no time limit on this, and we do not require or expect firms to close out retail consumers’ positions unless consumers ask for this."
The FCA based their policy on a consultation process which closed on 3rd October 2019, with 527 responses. The responses came from firms, trade bodies, retail consumers and EU National Competent Authorities. According to the policy document, the respondents focused on the FCA's argument "that cryptoassets do not have intrinsic value, and that retail consumers are unable to value them reliably". They also focused on "how proportionate a prohibition is and whether other, less restrictive measures would achieve our policy objectives" and their "supporting Cost Benefit Analysis".
The FCA has effectively put a warning within the policy document advising firms that its supervision in this area will focus on attempts to avoid the effect of the new rules by:
– inappropriately ‘opting up’ retail clients to become elective professional clients
– moving retail consumers to associated non-UK entities
– a focus on the conduct of inward passporting firms operating under the Temporary Permissions Regime
Giving consideration to whether this is the right time to bring in the prohibition based on the significant impact that COVID-19 is having on firms and the wider economy, the FCA states that it has delayed publication of this Policy Statement, but that "The risk of harm which the prohibition intends to address has not gone away as a result of COVID-19 and we think there is still a need to make the rules to protect consumers. We have, however, delayed publication of this Policy Statement and the implementation date so as to avoid imposing additional implementation work during the period when firms have been most impacted by Covid-19."
See the policy announcement here:
Download and read the full PS20/10 document with all details here: https://www.fca.org.uk/publication/policy/ps20-10.pdf
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