There is arguably a tension at the heart of the Financial Conduct Authority's (FCA) attitude to crypto, particularly in the retail sector. On the one hand, the FCA has made positive noises about being instrument neutral and not blocking the legitimate growth of the sector. This fits with the government’s growth agenda. On the other hand, there are aspects of the recent crypto and consumer duty guidance consultation which, I think, lead in a different direction and could create significant systems and controls challenges for firms. 

An overarching concern

Before addressing the detail, there is an overarching concern: this is yet another example of the FCA issuing important guidance through so-called guidance consultations or best practice guidelines. This approach bypasses the normal consultation and cost-benefit analysis requirements, yet the resulting guidance may contain obligations that are expensive to implement. The contrast is particularly stark when one considers that the FCA is currently producing a large number of cryptoasset consultations through the standard process and full cost-benefit analyses.

So to the guidance consultation. Our note on the factual contents is attached. I wanted to bring out a few of the more significant points which I think illustrate the above concerns.

Cross-cutting rules

In relation to the cross-cutting rules, I think that no one will have any objection to the need to avoid misleading features or to avoid taking advantage of vulnerable customers. 

Where things become a little more subtle, though, relates to the need to explain matters simply and how to describe risks as well as how to balance the need to avoid targeting “high risk” products at less sophisticated customers whilst recognising that crypto products are almost by definition riskier than some traditional equities or similar products. Much has been written about the risk-averse culture towards investing in the UK (and indeed the EU). Without significantly more guidance to assist the industry, and recognition that a higher risk profile is inherent to these products in an execution-only environment. the likely result will be a "chilling effect" on the sector. The statistics show that the likely effect is going to be to push investors towards unregulated offshore providers if this point is not handled carefully.

Avoiding foreseeable harm

Turning to the rule on avoiding foreseeable harm, it is welcome that the FCA recognises that firms should not be prevented from offering and providing high-risk products to retail investors. However, the real question is how this sits with the proposed guidance which gives as an example of bad practice distribution of “high risk cryptoasset product” through online platforms when they are intended for sophisticated investors. 

It is not clear which products the FCA has in mind and how firms are supposed to calibrate their approach given the overall risk profile of most of the products. Perhaps the FCA is intending to draw out the distinctions between stablecoins (or at least some stablecoins) and other products but if so, the guidance does not say this. 

I think that there is an overall point about the whole approach of the FCA to the Consumer Duty which is particularly acute in this case. Once one basically rejects a free market “buyer beware” approach subject to suitable disclosures and some broad controls to prevent genuinely vulnerable investors from buying the product one is left with an expensive and potentially market undermining regime which sits oddly with the desire to create a credible retail crypto licencing regime.

The same theme emerges when one considers the application of the cross-cutting rule on enabling and supporting customers to pursue their financial objectives. The FCA acknowledges that many investors may use crypto for purely speculative purposes. This is welcome. 

It is also understandable that good practice might include interactive dashboards and similar tools to show a client its relative allocations to different cryptoassets. However, there is a step change when one considers the best practice guidance that the firm should tell customers when “products or services are not delivering their intended benefits”. The question here is how this approach sits with an execution only model and does not begin to imply a broader set of duties on execution only crypto firms. One queries if this creates both considerable expense and will also fundamentally undermine the efficiency and flexibility of UK providers of retail crypto. 

Of less concern

There is a good argument that most of the guidance on the four outcomes is less likely to cause concern. 

For example, the proposed guidance on target market and that lending and borrowing are less likely to be appropriate to the target market is understandable. This type of general target market analysis as opposed to client-by-client analysis is well established across the current FCA conduct regime. The same goes for the concept of adding friction into the customer journey. There is also helpful proposed guidance on how to interpret the manufacturer and distributor concepts in the context of retail crypto. This is the type of sector specific guidance which is surely helpful given that the concept does not translate easily into a world quite different from that of traditional finance. 

The same is arguably the case with the proposed guidance on price and value with good practice being for firms to consider the proportionality of fees to the value provided and to not apply high withdrawal fees where operating or using a platform. There will be subjective elements here which may pose more of a burden for firms coming into the regulated sector than for those firms already used to the Consumer Duty. However, in concept it seems hard to argue with the basic focus of the proposed guidance. The same applies to customer understanding and support where the concept of tailoring communications to the customer base and giving them enough support seems reasonable and in line with the FCA’s normal Consumer Duty approach.

A tale of two halves

So taken as a whole, one might say that the FCA’s proposed guidance in this area arguably consists of a tale of two halves. 

There is the relatively uncontroversial customer cohort analysis which seems reasonable and in line with the need to balance consumer protection and growth objectives. 

There are then a number of aspects of the proposed guidance which seem to go further and appear to require much more customer specific analysis with the possible undermining of the whole idea of customers taking risk where this is appropriate and of an execution only service. 

Time will tell how this plays out, particularly as the new authorisation regime comes into effect next year.