FCA Maintains Stance on Crypto Investments for Retail Investors, Despite ETF Launches

Although certain rules for professional investors were softened earlier this year, the Financial Conduct Authority maintains its view that products based on cryptocurrency are not suitable for the general investor.
Thus, the FCA argues that crypto Exchange Traded Funds (ETFs) and comparable products are ‘ill-suited’ for retail buyers. Consequently, mainstream multi-asset funds or portfolios targeting the same audience also cannot invest in these increasingly popular assets.
While some critics are of the view that this more cautious approach will also reduce the status of the UK as a global financial centre, the FCA is not persuadable. With more consumers interested in Bitcoin and other cryptocurrencies-on platforms such as Coinbase than ever before, the regulator hasn’t changed its position, keeping in mind the potential risks in retail investment.

FCA’s Reasoning and Recent Developments

The FCA have once again made it clear that the very product of crypto-backed exchange-traded notes would be far from suitable for retail investors, given the potential for huge losses. It is currently continuing to work with the UK government, international partners, and the industry to shape its overall regulatory framework for crypto assets in the country.

It revised its policy on cETNs in March and thus made them available for direct purchase among professional investors like high net-worth individuals, sophisticated investors, or qualified professionals from an approved exchange and provider. However, the retail investor continues to be banned since January 2020 through non-action, where offering or selling derivatives in ETPs referencing crypto assets to UK retail consumers is prohibited. This would automatically restrict financial advisers, brokers, and other regulated firms from offering or selling any such products.

The projections of the FCA on the ban first to be implemented were supposed to save an average sum of between £19m and £101m a year from consumers who would not now suddenly and unexpectedly suffer losses and then potentially look to pursue claims for compensation.

Institutional Interest in Crypto on the Rise

That leaves direct access to cryptocurrencies closed off to retail investors for now, but increasingly open to institutional investors, which has been gathering pace since the FCA gave the stamp of approval to Bitcoin and Ethereum products on the London Stock Exchange (LSE) in May, a move in part facilitated by the rule changes that occurred earlier in the year.

According to Alex Pollak, head of 21 Shares in the UK, ” This regulatory approval will make professional investors pay more attention to adding digital assets to their portfolios. Traditionally, mainstream UK investment managers have been conservative when it comes to crypto-investing. Those perceptions are changing with FCA’s recent decisions.

Alex believes that this endorsement by the FCA of crypto products for professional investors is making the traditional wealth managers reconsider their stance. The more institutional investors gain access, the change in that conversation around incorporating crypto into broader investment strategies will only do so.

Also, to this note, Dovile Silenskyte, research director of digital assets at WisdomTree Asset Management indicates the same sentiment. She personally witnessed a huge spike in interest in this area from institutional investors after the FCA gave its seal of approval for Bitcoin and Ethereum products. Silenskyte says that many UK asset managers are all set to enter the crypto space once their risk and compliance frameworks are ready.

First, firms such as WisdomTree, 21 Shares and Invesco were amongst the first to benefit from receiving approvals from the FCA, with Fidelity International being the most recent. Such clarifications have been very much driven by the instilling of confidence amongst institutional investors.

Retail Investors Still Excluded

Although the institutional world is increasingly embracing this new genre of asset, direct investment in cryptocurrencies through a variety of traditional platforms is not yet accessible to retail investors. According to Pollak, it is a missed opportunity for the FCA, and if changes are not soon made in the attitude and stand of the regulator, the UK may lose its competitive edge in the fintech space.

According to a report of June 2023 by the FCA, 9% of UK adults already own crypto assets-more than double the rate the level was in 2021. The same report shows that 28% of its respondents, who are not crypto users, will be more likely to invest in the market when regulated.

While the FCA remains cautious, there are indications that some retail-focused fund managers have found ways to gain cryptocurrency exposure indirectly. For example, Ruffer’s six-month Bitcoin trade in 2020 was made possible through an underlying fund within their multi-asset portfolios.

While the FCA is doing its best to protect UK residents from investment risks, many people still fall victim to deceptive practices by financial advisers. Innocent individuals can easily get caught in these traps, often finding it difficult to seek a resolution.

Many are unsure of how to approach the company for compensation or how to engage with the FCA. This is where HT Legal can assist you. With our no win, no fee service, we offer you the confidence that we will work tirelessly to secure the compensation you deserve.

Start your claim online or Book a free consultation with one of our specialists today!