Introduction:
The Consumer Duty (“the Duty”) was introduced by the FCA to ensure that firms put retail customers, first, including customers who may be vulnerable, and deliver a consistently higher standard of care.
In a nutshell, firms must provide:
- products and services that meet customer’s needs and offer fair value
- communications which are clear, balanced and provided at the right time
- the support that customers need, when they need it.
What does Consumer Duty mean for cryptoasset firms:
From 25 October 2027, cryptoasset firms who operate in the UK must be authorised by the FCA and meet Consumer Duty requirements.
The FCA is currently in its final phase of consulting on the mechanics of how the Duty should apply to these firms and their feedback window is open until the 12 March 2026.
The Duty will apply to activities carried on with retail customers located in the UK. If other rules or local (onshored) regulations apply to that activity and cover a different area or territory, then the Duty will follow the same area or territory as those rules.
Cryptoasset firms must embed the Duty’s:
- three cross-cutting rules
- four Consumer Duty outcomes
In this, the first of two articles, we will set out what cryptoasset firms need to consider when applying Consumer Duty requirements under the three cross-cutting rules and they are as follows:
Cross-cutting rule 1 – Acting in good faith
Customers will have varying levels of knowledge and experience and they may not fully appreciate that cryptoassets will not be protected by the Financial Services Compensation Scheme (“FSCS”), understand how cryptoasset valuations are determined, or what blockchain and decentralised finance mean.
Acting in good faith requires firms to act openly, honestly and fairly when dealing with customers so that they understand the products they are buying. Ways in which firms can do this include:
- displaying information clearly so that the risks or limitations of products are not underplayed while the benefits are displayed more prominently.
- making sure that fees are correctly charged
- explaining charges clearly, for example gas-fee surges at execution, slippage and inactivity fees
- avoiding fee which could be difficult to understand, such as complex redemption mechanisms.
Particular care should be taken when dealing with vulnerable customers whose levels of financial literacy and resilience could be low by not targeting them with high-risk products. Nor should firms create urgency by pressurising customers into making quick decisions.
Cross-cutting rule 2 – Avoid causing foreseeable harm:
Some cryptoassets are inherently volatile and customer’s capital is at high risk.
The Duty does not require firms to protect customers from all harm, or guarantee that they will always get a good outcome. Customers are still required to take responsibility for their own decisions, but firms must ensure that they provide all of the information and support they need to make proper and effective decisions, including:
- clear and appropriate communications so that the risks and limitations of a product can be easily understood
- ensuring that products are well designed and suitable for retail customers
- regularly reviewing those products to ensure that they continue to perform well.
- securing IT systems so that customers are protected from scams
- proactively alerting customers to issues such as volatility
- regularly checking that products are only being sold to the identified target market
Well-designed redemption processes, efficient settlement, and controlled trading features (such as limiting impulsive execution mechanics) can all help mitigate foreseeable harm.
Cross-cutting rule 3 – Enable and support customers to pursue their financial objectives:
Cryptoasset firms operate in a high-risk, fast-evolving environment where retail customers may have diverse financial goals which range from investment diversification to capital preservation.
Firms must enable and support customers in meeting their objectives and goals. Ways in which they can do this include:
- helping customers to track the performance of their investments through dashboards
- providing them with tools to easily adjust their portfolios to match their portfolio composition preferences
- avoiding overemphasising the upside while downplaying risks such as volatility and liquidity constraints.
If you require any support implementing Consumer Duty, please don’t hesitate to get in touch with us.
