From 25 October 2027, cryptoasset firms who operate in the UK must be authorised by the FCA and meet Consumer Duty requirements.
In Part 1 of this article, we set out set out what cryptoasset firms need to consider when applying Consumer Duty requirements under the three cross-cutting rules. Now we focus on what the four Consumer Duty outcomes mean for cryptoasset firms in practice and evidencing meeting Consumer Duty requirements.
The Consumer Duty outcomes underpin the cross-cutting rules and represent the key touch-points a firm has with its customers.
Outcome 1 – Products and Services:
Firms must make sure that products and services are designed to meet the needs, characteristics and objectives of its defined target market and are distributed accordingly. This requirement applies across the product or service lifecycle.
Where firms manufacture (i.e. design, develop, create or issue) products, they must:
- identify and document the target market they want to sell their products to at a sufficiently granular level taking into consideration the customer’s risk appetite, financial sophistication, experience of cryptoassets and characteristics of vulnerability.
- define those customers who they do not want to sell their products to (the “negative” target market).
- Take extra care in defining the target market where products are more complex or risky for example involving lending or borrowing.
- consider whether there are particular products which might adversely affect certain customers such as vulnerable customers. For example, leveraged cryptoasset products are unlikely to be suitable for customers who are unable or unwilling to accept such losses.
Distributors (i.e. firms who offer, sell, recommend, advise on, arrange, deal) must:
- understand the product and its risks
- define an appropriate target market which must align with the manufacturer’s target market
- sell products to customers within the target market.
To protect customers from harm, firms could introduce appropriate positive frictions such as disabling one-click trading so that customers have time to consider their actions, ongoing monitoring and product modifications where issues are identified and closed pilot phases to test products before full launch so that issues can be fixed.
If a product no longer meets the needs of the target market, it should be withdrawn from the market following due consideration of the impact on customers who are no longer able to access these products.
Outcome 2 – Price and Value:
The price and value outcome is designed to make sure the price the customer pays for a product is reasonable and fair compared to the benefits of the product and any limitations.
Cryptoassets may trade with significant volatility and prices varying dramatically day-by-day. This does not mean that they are poor value but the FCA expects firms to assess the value of the charges within their control, including:
- the cost versus profit margin and whether the differential is fair.
- product benefits versus limitations
- competitor charges for similar products and whether the firm is an outlier
- target market needs and expectations
Consideration should also be given to whether vulnerable customers receive fair value as they may not be able to use a product to the same extent as other customers.
Distributors must also comply with fair value requirements. This includes demonstrating the benefits of the product to its target market and any commission paid to, or fees charged by them.
Outcome 3 – Customer Understanding:
Consumers often see cryptoasset products as exciting and innovative, and media attention and online influencers can reinforce this perception. Given the high-risk nature of some cryptoasset products and services, it is crucial that customer communications are fair, clear and transparent about the features and risks of products. This includes all communications from financial promotions, to terms and conditions and customer support centre calls scrips.
When preparing customer communications, consider whether:
- the level of understanding of the average customer so that the language and terminology used in communications can be easily understood by them.
- critical information is provided at the right time, so that customers can make an informed decision about what they are buying, such as the unavailability of FSCS protection and the potential for loss.
- communications are appropriately balanced and do not exploit customer’s potential behavioural biases, by encouraging them to invest in cryptoassets without having all relevant information.
Firms should test and monitor communications on an ongoing basis including analysing how customers interact with risk warnings and disclosures, making changes where issues are identified.
Outcome 4 – Consumer Support:
Firms must provide support that meets the needs of their customer base, including those with characteristics of vulnerability so that they can use the products and services as they expect.
The following are some of the key requirements under this outcome:
- Customers should know, before they purchase what support they can expect so that they can decide whether it is appropriate for them or not.
- Support provided should be accessible, responsive, and tailored to the risks and complexity of the products offered and the target market, taking into consideration customers who may be vulnerable, or who may have limited IT skills. This requirement is applicable both pre and post-sale.
- Friction points should be included at appropriate points, not to make life difficult for customers but to make them aware of issues and risks such as product volatility.
- Particular attention should be paid to how customers will be supported during issues and incidents, such as wallet freezes, staking failures, protocol upgrades, or when reporting fraud.
Evidencing meeting Consumer Duty requirements:
Evidencing that firms are delivering Consumer Duty is critical because it’s not enough to say that customers are at the heart of the business, firm must be able to prove that they are.
Having access to appropriate management information and data is crucial to evidencing that firms are assessing and monitoring the delivery of good customer outcomes, identifying and supporting vulnerable customers and acting in their clients’ best interests.
Without appropriate management information and data, firms will only be able to make assumptions about delivering good customer outcomes and they won’t truly understand where the gaps and harms are, which will not meet the FCA’s requirements.
Designing and development appropriate management information and data will take time so firms should not put off thinking about it.
Additional Guidance:
Recognising that there are differences between cryptoasset and traditional finance markets, such as distribution structures, overseas product manufacturers, and unfamiliar terminology for retail customers, the FCA has published guidance to help cryptoasset firms understand their expectations in relation to the Duty in GC26/2: Application of the Consumer Duty to cryptoasset firms.
The FCA has been clear this guidance is not exhaustive or comprehensive and should be read alongside the FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty which contains a detailed overview of the Duty.
Firms should also familiarise themselves with FG21/1: Guidance for firms on the fair treatment of vulnerable customers.
Where authorised firms communicate and approve financial promotions which are likely to be received by a retail customer, the Duty will also apply. Further guidance on the application of the Duty to cryptoasset financial promotions can be found in FG23-3: Finalised non-handbook guidance on Cryptoasset Financial Promotions
If you require any support implementing Consumer Duty, please don’t hesitate to get in touch with Cosegic today.
If you missed it, Part 1 explores how the three cross-cutting rules set the foundation for Consumer Duty in cryptoasset firms.
