UK: FCA consults on application of the FCA Handbook to cryptoasset firms – Consumer Duty

This briefing focuses on the application of the Consumer Duty to cryptoasset firms. It is the fourth of four briefings on CP25/25

See also the other briefings in this series:

• UK: FCA consultation on application of the FCA Handbook to cryptoasset firms - the context of the consultation and the categorisation of firms
• UK: FCA consultation on application of the FCA Handbook to cryptoasset firms – high level standards
• UK: FCA consults on application of the FCA Handbook to cryptoasset firms – operational resilience

Why should I read this?

In consultation paper CP25/25 “Application of FCA Handbook for Regulated Cryptoasset Activities” the FCA are consulting on how their existing Handbook rules will apply to firms which will come under its remit for the first time when new regulated activities related to cryptoasset are included in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) for the first time.

The rules on whose application they are consulting include High Level Standards such as the Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook (including governance, Senior Managers and Certification Regime, financial crime and operational resilience), and Business Standards (specifically the ESG Sourcebook).

For more details on the background to and purpose of the consultation, please see our previous briefing:

• UK: FCA consultation on application of the FCA Handbook to cryptoasset firms - the context of the consultation and the categorisation of firms

See also our previous client briefing:

• UK: HM Treasury and FCA propose new regulatory regime for cryptoassets

Applying the Consumer Duty and access to the Financial Ombudsman Service to regulated cryptoasset activities

Consumer Duty

The FCA are exploring two options:

• applying the Customer Duty to cryptoasset firms, supplemented by sector-specific guidance
• not applying the Consumer Duty but introducing new rules that would achieve an appropriate standard of consumer protection

Case for applying the Consumer Duty

The FCA’s preference is that in general the Consumer Duty should apply to all regulated cryptoasset activities with additional guidance.  However, they propose bespoke rules in respect of trading between participants in UK authorised cryptoassets trading platforms. 

Requiring cryptoasset firms to apply the Consumer Duty to their dealings with retail customers will be a significant change from the current circumstances.  It would introduce a number of specific requirements, including requirements to avoid foreseeable harm, enable informed decisions and provide fair value. 

Case against applying the Consumer Duty

Applying the Consumer Duty to cryptoasset firms may also pose difficulties in a number of areas, which might suggest that specific rules should be introduced. Specific rules could make the make standards of firms and consumers’ understanding of firms’ obligations to them clearer. Certain requirements may not fit well with the cryptoasset sector, as set out below.

Availability of manufacturer information

Many cryptoassets are created and distributed by decentralised networks or unknown (anonymous) issuers that do not involve a UK authorised firm and sometimes do not involve any known manufacturer at all. This could make it difficult or impossible for distributor firms to comply with product governance obligations that rely on at least some information being provided by the manufacturer.

Target market

If there is no identifiable manufacturer of a product, there will not be an identified target market or a developed distribution strategy. In such circumstances, compliance with the requirements for distributors may be extremely challenging, especially as the fungible nature of cryptoassets is such that distributors will not have control over onward distribution.

Price and value

The nature of cryptoassets and cryptoasset markets are such that it is difficult to assess price and fair value: the cryptoasset markets are highly volatile and the decentralised price formation process used for many cryptoassets is not transparent or comparable to traditional financial products.  Cryptocurrencies notoriously have no underlying intrinsic value.  Even stablecoins have not been immune to volatility and catastrophic losses in value.  Any assessment of value, and understanding what is a good outcome for a consumer in the space, will carry a high degree of uncertainty. 

Financial Ombudsman Service (FOS)

The FCA is inviting discussion on whether customers should be able to bring complaints relating to regulated cryptoasset activities to the FOS.

If retail customers of cryptoasset firms have access to the FOS, this would allow them to escalate unresolved complaints to an independent body without going to court – previously, such disputes lacked these formal resolution channels.  It would also enable customers to complain about matters which do not give rise to a claim in court. However, there may be imbalance in doing so, as the FOS’s compulsory jurisdiction only applies to UK firms (meaning that overseas firms won’t be captured) and it might not also capture third party firms often used in cryptoasset-related scenarios.

The decision on access to the FOS will also influence the way in which complaint handling rules apply to cryptoasset firms; currently those rules apply to all complaints which could be referred to the FOS, but the FCA may consider applying them to complaints against cryptoasset firms, even if those complaints cannot ultimately be referred to the FOS.

Conduct of Business Sourcebook (COBS) and Product Intervention and Product Governance Sourcebook (PROD)

COBS

Currently the only part of COBS that applies to cryptoasset firms are the financial promotions requirements.  In considering how to apply parts of COBS to cryptoasset firms, the FCA aim to ensure consumer protection, transparency, market integrity and fair treatment of clients.

The FCA proposal to extend the definition of ‘designated investment business’ to regulated cryptoasset activities. This would apply various COBS requirements to cryptoasset firms’ businesses, with amendments to take into account the nature of cryptoassets and regulated cryptoasset activities.

The application of COBS 11 (Dealing and managing), COBS 13 (Preparing product information), COBS 14 (Providing product information to clients) to cryptoasset firms will be the subject of a future consultation. The FCA propose that the rules in COBS 5-7, 10A, 12, 15, 16A, 17-22 will not apply to cryptoasset firms.

COBS 1 - Application

COBS rules will apply to transactions between cryptoasset trading platforms (CATPs) and retail clients, but not between CATPs and professional clients. Because the FCA also proposes to take an approach similar to the way in which COBS is applied to multilateral trading platforms, much of COBS will be disapplied for professional investors as regards the CATP’s services to them, but COBS protections should be applied as regards the CATP operator’s services to retail investors.

COBS 2 – Conduct of Business obligations

Cryptoasset firms will be required to provide clear, fair and non-misleading information before offering services, including disclosures about the firm, its services, designated investments, proposed strategies, execution venues and all relevant costs and charges, along with appropriate risk warnings.

COBS 3 – Client Categorisation

The future consultation on COBS 3 (following CP24/24) will be relevant to cryptoasset firms.

COBS 4 – Communicating with clients, including financial promotions

Financial promotions in respect of cryptoassets have been subject to regulation since October 2023, with all cryptoassets treated as restricted mass market investments (RMMIs).  The FCA are currently considering reclassifying UK-issued qualifying stablecoins as not being RMMIs, which would remove the requirement for risk warnings. The other requirements in COBs would still apply to such stablecoins and risk warnings would still attach to other cryptoassets, including non-UK-issued stablecoins.

COBS 8 – Client agreements (non-MiFID provisions)

The FCA proposals are to apply COBS 8 in full.

COBS 10 – Appropriateness

Firms must conduct appropriateness assessments where an application to transact is in response to a direct order financial promotion. Applying the relevant requirements to cryptoasset firms would require them to assess that the relevant cryptoasset is appropriate for the customer before processing the order.

The findings of FCA research are that many firms are not designing assessments that adequately reflect FCA expectations.  To address this, the FCA’s proposals are to change COBS 10 Annex 4G from guidance to a rule, requiring cryptoasset firms to cover all the topics covered in that provision in their appropriateness assessment.

COBS 16 – Reporting information to clients (non-MiFID provisions)

The FCA propose to require firms holding qualifying cryptoassets or client money to issue periodic statements with key information, including up-to-date valuations.  This will also apply to firms offering staking, lending, or borrowing.  Statements would have to be provided at least annually in a durable medium, unless clients have online access and have viewed a current statement within the past quarter.

PROD

The PROD rules are designed for traditional products with features that are quite unlike those of cryptoassets, with the nearest equivalent product-specific rules being those for MiFID products, which typically have lifecycles and/or clear financial performance metrics in a way that most cryptoassets do not. They also invariably have identifiable manufacturers in a way that some cryptoassets do not. The PROD rules also make neat distinctions between products designed for non-retail customers and retail customers.  Those distinctions don’t work for cryptoassets which are fungible and can easily be sold on from non-retail to retail customers in secondary markets. 

Rather than force a square peg into a round hole, the FCA are proposing not to apply PROD to firms that provide cryptoasset products or services.

Practical implications for cryptoasset firms

The proposed application of the FCA Handbook rules to cryptoasset firms have huge implications and ramifications for cryptoasset firms that want to continue to operate in the UK and firms that would like to now start providing regulated cryptoasset activities.  Firms wishing to do so should begin preparing now. 

Although the final and precise rules may not yet be known, the outline of the regulatory framework is clear.  Existing cryptoasset firms will need to build out their compliance functions and put in place policies and procedures in preparation for seeking authorisation.  They will need help to do so.  Some assistance with the authorisation process will be available from the FCA’s PASS service, however, firms will also need to seek legal advice.

Firms currently FCA authorised who are considering branching out into regulated cryptoassets activities will not have to deal with seeking initial authorisation but will still need to vary their permissions and, in doing so, will have much to do to understand and prepare for complying with regulatory rules as they apply to cryptoasset activities and services.

Both currently unauthorised firms and currently authorised firms will need to follow the consultations and the development of new rules closely.

Next steps

The consultation has now closed.  

The FCA plans to set out its final rules in Policy Statements which it intends to publish in 2026 in accordance with its Crypto Roadmap.

How Eversheds Sutherland can help

We offer specialised advice to all firms involved in the provision of cryptoasset-related products or services, including exchanges, brokers, investment managers, custodians, and token issuers.  We advise on the authorisation of cryptoasset firms, the safekeeping of cryptoassets, exchanges, and compliance with international regulations. Our services include guidance on custody models and infrastructure for cryptoassets, as well as advice on legal and regulatory aspects, including AIFMD and UCITS Directives. We support clients with regulatory frameworks, and assist with security mechanisms and using cryptoassets as collateral. Additionally, we apply traditional custody principles to new technology models to safeguard business interests. Our cybersecurity team collaborates with our award-winning cryptoassets team to protect assets and mitigate cyber risks.