FCA Proposes Consumer Duty and New Rules for Crypto Firms in UK Market Regulation

• FCA extends Consumer Duty to ensure transparency in crypto services.
• Crypto firms must follow new rules for consumer protection and safeguarding.
• Overseas crypto firms targeting UK market to establish UK entities.

The UK’s Financial Conduct Authority (FCA) has unveiled Consultation Paper 26/4, outlining how its existing regulatory framework will be applied to cryptoasset activities. This consultation is part of the UK’s effort to build a robust regulatory environment for crypto firms operating within the country or targeting the UK market.

According to the FCA, the Consumer Duty, which ensures transparency and fairness, will be extended to crypto firms, mirroring its application to traditional financial services firms. This move aims to ensure that crypto services provided to retail consumers are transparent, easily understood, and offer fair value. However, the duty will not apply to activities like trading on authorized cryptoasset platforms or admissions and disclosure activities.

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Consumer Protection Measures and Ombudsman Access

The consultation emphasizes the importance of consumer protection, especially during disruptions such as wallet restrictions or staking issues. In this regard, the FCA made it clear that crypto firms will be required to handle complaints in line with the FCA’s standard complaint-handling rules. Furthermore, customers will have access to the Financial Ombudsman Service to resolve disputes independently.

However, one notable exception is that the Financial Services Compensation Scheme (FSCS) will not cover crypto activities. As a result, consumers will not be compensated for losses if a crypto firm fails.

In addition to these consumer protection measures, the FCA proposes aligning the conduct rules for crypto firms with those applied to traditional investment firms. Parts of the Conduct of Business Sourcebook will apply directly to crypto firms, with some specific rules shifted to a dedicated Crypto Handbook. This aims to better tailor the regulations to the unique nature of cryptoassets. New safeguarding measures, including client money rules under CASS 17, will apply to crypto firms holding client funds.

Strengthening Oversight for Stablecoin Issuers and Overseas Firms

The FCA’s consultation also introduces enhanced oversight for senior managers in firms dealing with stablecoins and other cryptoassets. Firms that issue or hold large amounts of stablecoins will be subject to additional regulatory scrutiny based on asset values. This will ensure that they meet the required standards for consumer protection and financial stability.

In addition, the FCA proposes that most overseas crypto firms targeting the UK market must establish a UK legal entity. This move is aimed at ensuring these firms comply with UK regulations, particularly when it comes to safeguarding and offering regulated services. However, there may be some flexibility for platforms operating through UK branches.

Overall, FCA Consultation Paper 26/4 marks a crucial step toward a more comprehensive regulatory framework for the UK’s crypto market. By extending the Consumer Duty and introducing new rules for safeguarding, the FCA aims to balance consumer protection with the continued growth of the crypto sector.

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