FCA Handbook - PERG 18.11 Exclusions

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PERG 18.11 Exclusions

Question 11.1: What is the effect of exclusions for regulated cryptoasset activities?

Where an exclusion applies, an activity that would otherwise fall within a regulated cryptoasset activity is treated as not forming part of that regulated activity. It may fall within another regulated activity. Whether an exclusion applies will be fact-specific.

Not all of the general exclusions set out elsewhere in the Regulated Activities Order have been replicated for the regulated cryptoasset activities. A person should therefore not assume that an exclusion which applies to a traditional regulated activity will apply in the same way, or at all, to a regulated cryptoasset activity. In a number of cases, HM Treasury has instead applied tailored exclusions within the cryptoasset provisions themselves.

More generally, none of these tailored exclusions are subject to article 4(4) (Specified activities: general) of the Regulated Activities Order, which limits the scope of various exclusions in the Regulated Activities Order when a person is engaged in investment services or activities. For example, unlike the exclusion in article 15 (Absence of holding out etc.) of the Regulated Activities Order, the exclusion in article 9U of the Regulated Activities Order is not limited by the override in article 4(4). A person only has to consider the content of article 9U to see whether they are holding themselves out as buying and selling qualifying cryptoassets, and not the MiFID overlay arising as a result of article 4(4).

Question 11.2: Are any existing Regulated Activities Order general exclusions relevant to the new regulated cryptoasset activities?

Only a limited number of existing general exclusions have been applied to the new regulated cryptoasset activities. These exclusions include:

(1) activities carried on by firms with a Part 4A permission to manage an AIF or manage a UK UCITS where those activities are in connection with, or for the purposes of, managing the AIF or UK UCITS; and
(2) activities carried on by a person acting as an insolvency practitioner (article 72H (Insolvency practitioners) of the Regulated Activities Order).

A person who considers either of these exclusions to be relevant should refer to the statutory provisions themselves, as well as to any applicable PERG guidance given on those exclusions (notably PERG 2.9.22G, and PERG 2.9.25G to PERG 2.9.27G, respectively).

See PERG 18.6.12 in respect of persons acting as depositaries of UK UCITS or AIFs.

Question 11.3: Are there any new general exclusions relevant to the new regulated cryptoasset activities?

The following 2 exclusions apply to all regulated cryptoasset activities:

(1) activities carried on for the sale of goods or supply of services (Article 9Z10 (Activities carried on for the sale of goods or supply of services) of the Regulated Activities Order); and
(2) activities incidental to the carrying on of a profession or business (Article 9Z11 (Activities incidental to the carrying on of a profession or business) of the Regulated Activities Order).

Question 11.4: When does the exclusion for the sale of goods and services (article 9Z10 of the Regulated Activities Order) apply?

Article 9Z10 of the Regulated Activities Order provides a general exclusion for certain activities carried on for the purpose of, and, where applicable, in connection with, the sale of goods or supply of services.

Broadly speaking, the exclusions focus on cases where the main business of a person is to sell goods or supply services, but where certain activities may have to be carried on for the purposes of that business which would otherwise be regulated activities.

For the purposes of this exclusion, the sale of goods and services does not include the sale of qualifying cryptoassets as ‘goods’, or the carrying on of regulated cryptoasset activities as ‘services’.

This exclusion is structured in a way that makes it important to consider which limb (Article 9Z10(1) or (3)) applies on the facts:

(1) Article 9Z10(1) (the ‘supplier to customer’ limb) excludes an activity carried on for the purpose of the sale of goods or supply of services by a supplier to a customer. This exclusion does not apply to the safeguarding cryptoassets activity or the arranging cryptoasset safeguarding activity to the extent that it applies to relevant specified investment cryptoassets.
(2) Article 9Z10(3) (the ‘related sale or supply’ limb) is distinct from, and narrower than, the ‘supplier to customer’ exclusion. It excludes activity carried on for the purpose of a related sale of goods or supply of services, but only for the activities of dealing in qualifying cryptoassets as principal, dealing in qualifying cryptoassets as agent and arranging deals in qualifying cryptoassets.

A ‘related sale of goods or supply of services’ is a sale of goods or supply of services to the customer otherwise than by the supplier, but for the same purpose as the supplier’s own sale or supply described in article 9Z10(1). This may be, for example, where a transaction for goods and services is made indirectly through an agent. A practical example of this is given at PERG 18.11.5.

See PERG 18.8.8 regarding firms providing information, analytics, data or dashboard services.

Question 11.5: We are a non-financial services firm supplying goods and services both directly and through a network of agents to our retail customers and accept settlement for our goods and services in the form of qualifying cryptoassets. We do not hold the qualifying cryptoassets of our customers and only receive these upon settlement of the customer transaction. Do we require authorisation?

No. Though you may be undertaking a regulated cryptoasset activity by accepting settlement in qualifying cryptoassets, you can rely on the exclusion in article 9Z10 of the Regulated Activities Order, provided that your main business is to sell goods or supply services to your customers. Various factors are likely to be relevant for the purposes of determining your main business, including turnover, profit, capital employed, numbers of employees and time spent by your employees. The network of agents used to supply goods and services may benefit from this exclusion as well via the related sale or supply.

Supplying services for the purposes of this exclusion does not include regulated cryptoasset activities.

Question 11.6: Are activities incidental to the carrying on of a profession or business (Article 9Z11 of the Regulated Activities Order) excluded?

Yes, article 9Z11 of the Regulated Activities Order excludes activities that are carried out by a person on an incidental basis in the course of that person’s profession or business that does not otherwise consist of regulated activities, and where the profession or business is supervised and regulated by a designated professional body listed in article 2 (Designated professional bodies) of the Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001 (SI 2001/1226).

Article 9Z11(2) sets out factors relevant to whether an activity is carried on in an incidental manner. These include:

(1) a close factual connection between the carrying on of the professional activity and the incidental activity to the same client, such that the incidental activity may reasonably be regarded as a necessary ancillary to the professional activity;
(2) that the incidental activity does not provide a systematic source of income to the person providing the professional activity; and
(3) that the person does not market or otherwise promote their ability to provide the incidental activity, except to the extent that it is disclosed to clients as a necessary ancillary to the carrying on of the profession or business.

In the FCA’s view, the criteria set out in PROF 2.1.14G in relation to section 327(4) (Exemption from the general prohibition) of the Act are also relevant when considering whether a person can rely on this exclusion. However, there are certain regulated cryptoasset activities that do not fall within the exemption from the general prohibition under section 327. These are: issuing a qualifying stablecoin, dealing in qualifying cryptoassets as principal and arranging qualifying cryptoasset staking. See PERG 2.10.12G to PERG 2.10.16G.