Cross-border distribution: a fresh look at sanctions for non-compliance

In this article, we take a look at some interesting examples and trends regarding enforcement for breaching financial services marketing rules globally. As we have now launched our Rulefinder Crypto Assets service, we also look at recent examples of crypto asset enforcement.

Enforcement in financial services regulation

A range of enforcement actions have caught our eye at aosphere lately. We have seen regulators continue to focus on the issues raised when selling complex instruments such as contracts for differences (CFDs) to retail investors. We are also seeing regulators becoming increasingly open about their approaches to enforcement and areas of focus for them, although in many cases examples of public enforcement actions remain relatively rare. Firms should note that even where a breach does not result in a public enforcement action, such breach could jeopardise the outcome of future approvals/registrations sought from the regulator and/or give rise to risks in terms of investors alleging that transactions should be voided/rescinded on the basis that they were entered into in breach of the regulatory framework. 

We set out a summary of some interesting examples/trends below.

Marketing complex instruments to retail clients

As an example of the focus of regulators on firms marketing and selling complex instruments to retail clients, we have seen a number of actions recently against firms incorporated in Cyprus for activities related to CFDs.

• In France, in November 2023, the AMF Sanctions Commission sanctioned a French tied agent of a Cypriot investment services provider and its manager for breach of professional obligations in offering CFDs, including: (i) failing to verify that its sellers had minimum qualifications and sufficient knowledge; (ii) having incomplete, unsuitable customer questionnaires; (iii) giving insufficient risk warnings in promotions; and (iv) failing to disclose that the agent was tied. The AMF fined the tied agent EUR300,000 and the manager EUR100,000. Both were banned from conducting further activities in France
• In the UK, the FCA has brought a number of actions against Cyprus-registered investment firms for offering CFDs to UK customers using misleading financial promotions (including celebrity endorsements) and highly questionable sales practices. Penalties have included the removal of passporting rights and supervisory notices preventing the firms from marketing to UK customers, closing trading positions and mandating the return of money to UK customers
• In the Netherlands, the AFM has been working together with the Cypriot regulator to tackle Cyprus-based investment firms with a European passport who have been targeting consumers by issuing false advertisements and trading in complex CFDs. The actions taken involve the surrender of licences in Cyprus and the exclusion of the relevant firms from the Dutch market

A focus on reverse enquiry

We are continuing to see regulators flag reliance on reverse enquiry as an area of focus for them (see our article on reliance on reverse enquiry in the EU for examples) but reports of public enforcement in this area remain low.

However, note that in France, in April 2021, the AMF enforcement committee sanctioned a firm and an individual for activities in relation to a reverse enquiry. The enforcement committee noted that reverse solicitation, by nature unpredictable and at the sole initiative of a client, is not compatible with the use of a standard pre-drafted document provided in advance by a promoter to substantiate a reverse solicitation. We do ask counsel to consider this specific point at aosphere, as to whether standard form confirmations are recommended for use in reverse enquiry situations in their jurisdiction or whether this is something to be avoided.

New approaches to enforcement?

• In the UK, the FCA published a consultation paper in May 2024, which included a proposal to “name and shame” persons it is investigating. The proposals included that the FCA would publish information about its enforcement investigations, including their opening and progress and identifying the subject of the investigation, if the FCA assessed it to be in the public interest to do so. The proposals received widespread push back from the industry and industry bodies, including that this was out of line with international practices. The FCA highlighted in the consultation that the approach was consistent with the approach taken by MAS in Singapore, but did not note any other international regulators with a similar approach. In September 2024, the FCA signalled a softening of its approach, stating that “we are listening [to firms’ objections to the proposals]. We have analysed each and every one of the more than 130 responses to our consultation. And we are not going to rush this”
• In Indonesia, whilst the scope of the enforcement/supervisory duty of the regulator is limited to Indonesian legal entities, we understand from local counsel that the OJK and the Investment Alert Task Force established by it have been increasingly active in asking overseas firms to clarify if their business has a sufficient nexus with Indonesia and thereby whether they can be considered as factually doing business in Indonesia

Other enforcement actions

We are also seeing a range of other enforcement actions being taken and sanctions being imposed by regulators:

• In Italy for example, a large number of Consob’s enforcement measures involve blocking services and licensable activities being promoted/provided through a website or other distance communication means (e.g. a digital platform). As of December 2022, Consob handled 350 cases where service providers were suspected to carry out investment services through distance communication means without being duly authorised
• In the PRC, just prior to introducing new securities brokerage regulations in January 2023, the CSRC published a brief on the illegal cross-border provision of overseas securities brokerage services by two overseas securities brokers to PRC onshore residents. The two brokers have been prohibited from soliciting PRC onshore investors or originating new PRC onshore clients. Both brokers removed their apps from PRC app stores in May 2023
• In Brazil, the CVM has been active recently, ordering a number of unregistered overseas firms to suspend their marketing of unregistered securities to Brazilian residents. In one case, the overseas firm had hired promoters in Brazil. Each unregistered firm was required to suspend their activities or face daily fines of R$1,000 per day
• The BaFin in Germany has acted against a number of firms who have been offering securities to the public in Germany without an approved prospectus. The action taken has been prohibition of the particular offer rather than any fine

Crypto Assets – a flurry of enforcement actions

Regulators have been active in the rapidly developing area of crypto assets, trying to strike the right balance between providing adequate investor protection and allowing the development of new technologies and flexibility as regulatory frameworks develop. Below are a few recent examples of the different jurisdictional approaches being taken with respect to crypto asset enforcement.

Regulation via enforcement

• In the United States, there is currently no comprehensive regulatory framework governing crypto assets, but multiple enforcement actions are being taken by a number of agencies. These actions often result in significant penalties being imposed and in cease and desist orders. Disagreements are arising as the U.S. considers how to best regulate this sector
• For example, in February 2023, the SEC charged a firm with failing to register the offer and sale of its crypto asset staking-as-a-service programme, arguing that this staking program should have been registered with the SEC as a securities offering. The firm settled and agreed to pay a USD 30 million penalty and to immediately cease offering or selling securities through crypto asset staking services or staking programs
• In a separate statement, SEC Commissioner Hester Peirce disagreed with the action, noting that crypto-related offerings are not making it through the SEC’s registration pipeline and there isn’t sufficient guidance on a regulatory approach to staking programmes. Peirce commented that “instead of taking the path of thinking through staking programs and issuing guidance, [the SEC] again chose to speak through an enforcement action, purporting to “make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection”. Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it”
• In Australia, the crypto sector is currently largely unregulated, although there are various ongoing consultations in respect of introducing regulation. Whilst regulation remains under development, ASIC has taken a number of enforcement actions against crypto asset businesses with the intention of clarifying what is a regulated product and when the provider needs a licence. Penalties have included fines, stop orders and injunctions and criminal sanctions. For example, in September 2023, ASIC commenced civil penalty proceedings against Bit Trade Pty Ltd, provider of the Kraken crypto exchange to Australian customers, for failure to comply with certain design and distribution obligations and in August 2024, the federal court found in ASIC’s favour

Public warnings

• In the UK, it has been just over one year since the FCA became responsible for regulating the marketing of crypto assets. In that time, the FCA has issued 1,702 consumer alerts about illegal crypto asset advertisements, taken down over 900 crypto asset scam websites and removed 56 apps that were illegally promoting crypto asset investments. The FCA has also published a warning list for consumers to check before making any investment in crypto and provides information in its quarterly updates on how it is engaging with crypto firms to implement measures to ensure compliance with the financial promotions regime
• The regulators in Hong Kong, SAR have also been active in warnings relating to crypto asset activity. For example, in September 2023, the SFC issued a warning statement to investors relating to the activities of the virtual asset trading platform known as JPEX and the SFC more generally maintains an alert list of suspicious virtual asset trading platforms

Blocking access

• In France, in April 2024, the AMF Board decided to withdraw the approval it had issued for Envviron's public offering of DevvE tokens and ordered the cessation of all communications concerning the offering. The AMF Board noted that the public offering no longer complied with the information contained in the information document approved by the AMF. The AMF and the ACPR also regularly issue warnings to the public against the activities of entities offering investments in crypto-assets and digital asset services in France without being authorised to do so. The AMF publishes a blacklist specifically dedicated to unauthorised websites operating in the crypto asset segment
• In Singapore, in September 2023, MAS issued a 9-year prohibition order against two directors of a firm for providing false information and having inadequate risk procedures in place to address the risks associated with the cryptocurrency and digital asset investments under management. Under the prohibition order, the directors are prohibited from performing regulated activities and from taking part in the management of, being director of or becoming a substantial shareholder of any capital market services firm

Context

At aosphere, we include sections in our memoranda for both Marketing Restrictions and Marketing Restrictions – Asset Management, where we ask counsel to set out the possible legal consequences of a breach of laws or regulations. In addition to asking what the official potential sanctions could be, we ask counsel to provide any recent examples of enforcement actions taken by the regulators or courts in their jurisdiction, as well as asking for commentary on the attitude of the regulators and any accepted or tolerated market practices that might apply.

In each of our Crypto Asset full jurisdiction surveys we include a section on enforcement actions. We also maintain a global tracker of recent enforcement actions, including penalties/sanctions imposed.