Today, memes have become an integral part of the cryptocurrency world. They range from jokes on social media platforms like Twitter to full-fledged crypto projects with multi-billion-dollar market capitalizations. However, according to the UK government, crypto memes are problematic, leading to the proposal of new stringent regulations. We already touched it in this Elon Musk related article actually.
Too many people across the UK are being shown financial promotions from unsuitable sources.— Financial Conduct Authority (@TheFCA) July 17, 2023
We’ll be ramping up our work to stamp out illegal financial promotions, particularly those found on social media. #financialpromotions#financialserviceshttps://t.co/sK8r5ExxVm
The End of Crypto Memes
While memes are generally intended for humor, the Financial Conduct Authority (FCA), the primary financial watchdog in the United Kingdom, argues that these memes can also be seen as financial promotions. Therefore, a legislative framework has been proposed that essentially opens an attack on influencers on social media.
The proposals for new social media guidance will modernize the information firms should use when promoting financial products or services online. For example, the FCA is consulting on extending its guidance to reflect the current ways social media is being used to advertise financial services and products.
Explaining Constitutional Amendments pic.twitter.com/oYkMPBe9Zi— Elon Musk (@elonmusk) May 13, 2023
Regulate ‘Finfluencers’ in the Crypto Market
The FCA has been ramping up its scrutiny of online, often illegal, financial promotions, recognizing the significant increase in notoriety of ‘finfluencers’ and the potential for consumer harm taking place online.
The FCA has also teamed up with the Advertising Standards Authority to help educate consumers and influencers about the risks involved in promoting financial products. This work has included an infographic, roundtable discussions, and live events to build awareness of the harm that can occur.
FCA engagement has also helped secure changes to the advertising policies of several Big Tech companies to only allow financial promotions that have been approved by FCA-authorised firms. The regulator will be continuing this engagement to ensure more is done to protect consumers.
The consultation follows the announcement of new advertising rules for crypto firms marketing to UK consumers.
‘Finfluencers’ include Kim Kardashian, Lindsay Lohan, and so on. Some even host shows to talk about crypto. Europe is actually putting a stop to this; companies that use ‘finfluencers’ to promote their products will be held liable in case of fraud. “Financial Advisor” is in many countries a protected title; you cannot simply put that on your name.
‘Refer a friend’ No Longer Allowed
From October 8, 2023, the FCA will ban incentives to invest in crypto, such as ‘refer a friend’ bonuses. Firms must also introduce clear risk warnings and a 24-hour cooling period to give first-time investors time to consider their investment decision. These measures are similar to the regime in place for other high-risk investments.
The new social media guidance supports two of the FCA’s core commitments set out in the 2023/24 business plan: to reduce and prevent serious harm and to set and test higher standards.
Many crypto memes are shared on social media without people realizing that these messages can be considered financial promotions and financial advice. According to UK law, such promotion is allowed but only under strict conditions.
For example, a disclaimer stating that investing in crypto can be risky must be included. Currently, this is often not done, and the FCA aims to change that.
Illegal Crypto Promotions
The FCA also notes that the number of “illegal crypto promotions” is growing. What is particularly concerning for the FCA is that these promotions predominantly reach a younger audience. Additionally, the FCA states that 60% of all 18- to 29-year-olds follow influencers on social media.
Therefore, the FCA warns ‘finfluencers’ that spreading crypto promotions could, in the worst cases, result in a prison sentence of up to two years or a hefty fine. It’s clear that the FCA doesn’t find crypto memes funny at all.
What is a Financial Promotion?
Under Section 21 (‘S21’) of the Financial Services and Markets Act 2000 (‘FSMA’), a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity. This guidance will refer only to engaging in investment activity, but the principles are also relevant to invitations/inducements to engage in claims management activity. For these purposes, ‘communicate’ includes causing a communication to be made. This is known as the financial promotion restriction. This financial promotion restriction does not apply if:
- the promotion is communicated by an authorized person;
- the content of the promotion is approved by an authorized person; or
- an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘FPO’) applies.
Cryptoasset firms registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘MLRs’) should familiarize themselves with how they can communicate cryptoasset promotions under the regime, as summarized in PS23/6.
S21 has a broad territorial application. It applies even where a communication originates outside the UK if it is capable of having an effect in the UK. A breach of S21 is a criminal offense punishable by up to two years’ imprisonment, the imposition of an unlimited fine, or both.
An illegal financial promotion is one communicated in breach of S21. For example, an (unauthorized) influencer communicating a financial promotion without approval from an authorized person and where no FPO exemption applies. They provide extensive guidance on the scope of the financial promotion regime in Chapter 8 of the Perimeter Guidance Manual (PERG).
A non-compliant financial promotion is one that has been lawfully communicated or approved by an authorized person but breaches the financial promotion rules. For example, an authorized person communicating a financial promotion that has an obscured risk warning that breaches the rules on prominence.
Any form of communication (including through social media) is capable of being a financial promotion if it includes an invitation or inducement to engage in investment activity. This will include communications through ‘private’ or invitation-only social media channels like chatrooms such as Discord and Telegram.
A communication must be made ‘in the course of business’ (‘the business test’) to be a financial promotion. The business test requires a commercial interest on the part of the communicator. It is intended to exclude genuine non-business communications such as friends talking in the pub. PERG 8.5 gives more detail on this.
The business test can capture communications even where the communicator is not making the communication in the context of a direct commercial arrangement. They provide additional guidance on the application of the business test in Chapter 3 of this guidance.
The new Financial Promotion Rules
Authorized persons must comply with the rules when communicating or approving financial promotions. While the detail of these rules differs between sectors, as outlined in paragraph 13, financial promotions are generally subject to the requirement to be fair, clear, and not misleading. Promotions that fail to meet this standard can cause consumers to buy products and engage in services that aren’t suitable for their needs, leading to poor outcomes for them. These principles apply to promotions relating to claims management businesses in the same way as other financial products or services.
The Consumer Duty requires firms to build upon the core requirement for communications to be fair, clear, and not misleading. Principle 12 and PRIN 2A, including the cross-cutting rules, will apply to a firm communicating or approving financial promotions likely to be received by retail customers. Where the Duty applies, firms must consider how their communications deliver good outcomes for retail customers and promote consumer understanding. Firms should review and consider how the non-Handbook guidance on the Consumer Duty (FG22/5) applies to their social media promotions. They also provide some additional suggestions in Chapter 2 of this guidance.
Social Media Communication has to change
Communications through social media can reach a wide audience very rapidly. When designing their financial promotions, firms should carefully consider the way material on social media is distributed. For example, firms should ensure that their original communication would remain fair, clear, and not misleading, even if it ends up in front of a non-intended recipient through third-party sharing.
Firms are reminded that image advertising, only consisting of the name of the firm, a logo, or other images associated with the firm, a contact point, and a reference to the types of products or services provided by the firm or to its fees or commissions, are likely to be exempt from many of the financial promotion rules (and may not even amount to a financial promotion at all).
However, the image advertising exemption from the rules does not extend to all sector-specific sourcebooks, so firms should familiarize themselves with the relevant rules for their business.
Firms should be aware that different sectors have specific financial promotion rules. Firms communicating or approving financial promotions should be aware of the rules in the sourcebooks that are relevant to their business.