Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook February 2023

Regulation of Buy-Now Pay-Later: HM Treasury consultation on draft legislation

On 14 February 2023, HM Treasury published its final consultation on the proposed legislative changes to bring Buy-Now Pay-Later (BNPL) products into scope of the UK Consumer Credit Act 1974 (CCA), and the Financial Conduct Authority (FCA) regulation. The deadline for comments is 11 April 2023.

The government is proposing to limit the scope of regulation to BNPL agreements that are offered by third party lenders (unless they fall within an exemption). To achieve this, HM Treasury has published draft legislation in the form of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2023. When finalised this statutory instrument will amend Article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) as well as other regulations.

The outcome of the amendments to Article 60F of the RAO will mean that agreements will become regulated where they are borrower-lender-supplier agreements for fixed-sum credit to individuals or relevant recipients of credit which are:

• interest-free, repayable in 12 or fewer instalments within 12 months or less;
• where the credit is provided by a person that is not the provider of goods or services which the credit agreement finances (third-party lenders); and
• not exempt as a result of falling within one of the exemptions (there are a number of exemptions).

The consultation also confirms the government's proposed approach to the regulatory controls that would apply to agreements that are brought into regulation. The government has set out that:

• merchants would be exempt from FCA regulation (as credit brokers) where they offer newly regulated agreements as a payment option; 
• all advertising and promotions of newly regulated agreements would fall within the financial promotions regime;
• certain provisions in the CCA would be disapplied in relation to newly regulated agreements, particularly those relating to the provision of detailed pre-contractual information to consumers where FCA rules would apply instead; and 
• the Financial Ombudsman Service jurisdiction would be expanded to cover newly regulated agreements.

The FCA is expected to publish a consultation on the proposed rules shortly. New rules are anticipated to be made later in 2023, when parliamentary time allows. There is expected to be a transition period allowing firms time to familiarise themselves with the regime and make necessary changes to their business models ahead of the day on which the regulation commences. 

The consultation also proposes a temporary permissions regime designed to enable firms to transfer into the new regulatory regime before seeking full authorisation at a future date.

HM Treasury consultation and further call for evidence on regulatory approach to cryptoassets

On 1 February 2023, HM Treasury published a consultation paper on the UK regulatory approach to cryptoassets. Comments can be made until 30 April 2023. Once legislation is laid, the FCA will consult on its detailed rules for the sector.

The consultation follows the government's commitment in April 2022 to introduce a new regulatory regime for cryptoassets. It sets out proposals for the future regime and marks the next phase of the government's approach to regulating cryptoassets. The consultation focuses on the future UK regulatory framework for cryptoassets used within financial services, rather than the wider application of distributed ledger technology (DLT) in financial services or the use of cryptoassets outside financial services.

HM Treasury intends to create a number of new regulated or designated activities tailored to the cryptoasset market where these activities mirror regulated activities performed in the traditional financial services industry under the RAO. These include:

• Operating a cryptoasset trading venue.
• Dealing in cryptoassets as principal or agent.
• Arranging (bringing about) deals in cryptoassets and making arrangements with a view to transactions in cryptoassets.
• Operating a cryptoasset lending platform.
• Payment activities relating to cryptoassets.

For newly defined RAO activities, firms which are already authorised under the Financial Services and Markets Act 2000 and intend to undertake the activity will generally need to apply for a variation of their permission from the FCA (and the Prudential Regulation Authority for dual-regulated firms). Regulatory permissions will not be automatically granted for firms that are already authorised.

HM Treasury also sets out its proposed requirements for a market abuse regime in the proposed crypto regulatory framework and issues a call for evidence relating to decentralised finance, certain other cryptoasset activities and sustainability in the context of regulating cryptoassets.

Financial promotions: HM Treasury policy statement on exemption for cryptoasset businesses approving own financial promotions and FCA statement on the new UK financial promotions regime 

On 1 February 2023, HM Treasury published a policy statement on regulating certain types of cryptoasset financial promotions.

HM Treasury published its response to its consultation on bringing certain qualifying cryptoassets within scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 in January 2022. Since HM Treasury issued its response, and the FCA consulted on its proposed detailed rules for high-risk investments, HM Treasury has received feedback on potential unintended consequences for the industry. 

There is concern that the requirement to be authorised means most cryptoasset businesses would be unable to communicate their own promotions, unlike other financial services firms that are typically authorised. There is also concern around a lack of suitable authorised persons in the market willing and able to approve crypto promotions. 

In response, HM Treasury is introducing a bespoke exemption from the financial promotion restriction in section 21 of the Financial Services and Markets Act 2000 for certain financial promotions relating to qualifying cryptoassets. This will enable cryptoasset businesses registered with the FCA under the Money Laundering Regulations 2017 (MLRs 2017), who are not otherwise authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets. 

Registered cryptoasset businesses relying on this exemption will be unable to approve financial promotions or to communicate their own financial promotions in relation to other controlled investments. Registered cryptoasset businesses seeking to use this exemption will not require any further FCA registration or authorisation.

The government will introduce legislation giving effect to the planned cryptoasset financial promotions regime, including this exemption, as soon as parliamentary time allows. As part of this, HM Treasury will confer powers on the FCA to enable it to make rules applying to financial promotions communicated in reliance on the exemption.

HM Treasury intends the exemption to be temporary, and will revisit its approach to the exemption as part of its wider review of the future regulatory approach to cryptoassets.

Further, on 6 February 2023, the FCA published a statement on the new UK financial promotions regime it plans to introduce for firms that market cryptoassets to UK consumers, where it refers to the policy statement published by HM Treasury discussed above.
The FCA:

• Confirms that it will publish its final rules for cryptoasset promotions once the relevant legislation has been made.
• Explains that it expects to take a consistent approach to cryptoassets to that taken in its new rules for other high-risk investments.
• Encourages all firms, including those based overseas, to get ready for the new regime, and commits to take "robust action" where it sees firms promoting cryptoassets to UK consumers in breach of the requirements. This may include taking down websites that are in breach, issuing public warnings, and enforcement action.
• Confirms that cryptoasset businesses already registered under the MLRs 2017 will not have to apply for any further permissions to communicate their own promotions.

FCA feedback on applications for cryptoasset business registration

On 25 January 2023, the FCA published a webpage containing feedback on good and poor-quality applications made by cryptoasset business for registration under the MLRs 2017.

On the webpage, the FCA sets out its expectations of applicants during the application process. The bulk of the guidance relates to the information that an applicant should submit as part of its application, including:

• Business plans. An applicant's business plan should include details of its business model, roles and responsibilities of business partners, sources of liquidity, detailed customer journey and flow-of-funds charts. Applicants should not submit business plans that do not include forecasts or that provide unrealistic forecasts.
• Products and services. Applicants should provide a comprehensive and accurate description of their products and services.
• Risk assessment and management. Applicants should design a business-wide risk assessment (BWRA) that is tailored to its business model. The BWRA should identify and assess any proliferation financing risks to which the applicant's business is subject. The FCA will not approve an application where the applicant has an incorrect understanding of the risks associated with cryptoasset products.
• Policies, systems and controls. Applicants should establish policies and systems to manage and mitigate appropriately the risks identified in the BWRA. The FCA will not approve an application where the applicant has an underdeveloped AML framework or a weak governance structure.

Since it started supervising UK cryptoasset businesses under the MLRs 2017, the FCA has determined over 260 applications for registration. Of these, 15% were approved, 74% were refused or withdrew their applications and 11% were rejected.

Treasury Committee report identifies concerns about PSR's proposed approach to introducing mandatory reimbursement for APP fraud

On 6 February 2023, the House of Commons Treasury Committee published a report on the Payment Systems Regulator's (PSR) proposals to introduce mandatory reimbursement for authorised push payment (APP) scams.

The report sets out the committee's concerns about the PSR's proposal to delegate the mandatory reimbursement of APP fraud to Pay.UK through the Faster Payment scheme rules. Specifically, the committee considers that the proposal is flawed because Pay.UK is an industry body and therefore has an inherent conflict of interest; Pay.UK's governance structures and lack of regulatory powers provide opportunities for banks and other payment service providers (PSPs) to delay implementation of the process further; and Pay.UK lacks the enforcement powers of a regulator.

The committee recommends that the PSR revises its plans to incorporate using its own powers of direction over PSPs. It considers that this will give the PSR more control over the process and result in better outcomes for consumers.

Alongside its report, the committee has also published:

• A letter it has sent to the Bank of England (BoE), asking whether the BoE is taking similar measures to reduce levels of APP scams using the Clearing House Automated Payment System (CHAPS).
• A letter it has sent to the FCA, asking whether the FCA intends to implement similar measures for "on-us" fraud, where the victim and fraudster hold accounts with the same PSP.
• A letter to the PSR, asking why the PSR has proposed a £100 minimum threshold and a £35 excess for reimbursement.
• A letter it has sent to the Financial Ombudsman Service (FOS) asking whether the slow resolution of reimbursement disputes by the FOS could undermine the PSR's proposals.

The PSR has also published its response to the committee's report. It notes that the report includes a misinterpretation of its proposal on use of its powers and that it has clarified this to the committee. It states that it will publish its final position in May 2023.

BoE and HM Treasury consult on case for retail central bank digital currency

On 7 February 2023, the BoE and HM Treasury published a joint consultation paper setting out their assessment of the case for a retail central bank digital currency (CBDC).

The authorities consider it likely that a digital pound will be needed in future, and preparatory work is justified. The aim of the consultation paper is to seek feedback on the policy and technical work carried out so far, with a view to informing a future decision on whether to build and launch a digital pound. The authorities are also seeking feedback on current proposals on the form and functions of a digital pound.

A technical working paper produced by the BoE has been published alongside the consultation paper. It focuses on technical requirements and design considerations for the digital pound.

Interested parties are invited to give their views on both papers until 7 June 2023.

The authorities' work will now move onto a "design phase" to ensure that development of a digital pound can be accelerated if a decision is taken to build it. They explain that a decision about whether to implement a digital pound will be taken around the middle of the decade and will largely be based on future developments in money and payments. The earliest stage at which the digital pound could be launched would be the second half of the decade.

In addition, the BoE has recently published a speech, given by Jon Cunliffe, BoE Deputy Governor, Financial Stability, on a CBDC.

In his speech, Mr Cunliffe talks about the joint BoE and HM Treasury consultation paper discussed above. In particular, he sets out some of the thinking behind the consultation paper and the next steps proposed.

Points of interest include the following:

• "Public" money (that is, money issued by the state for general use), will become increasingly less useful and usable. New forms of money are likely to emerge, offering new possibilities, issued by new as well as established players. This raises the question of how the UK can continue to ensure that all types of money used in the UK are denominated in sterling, remain safe and that each is interchangeable on demand with all other types of money without loss of value.
• The experience of digitalisation is that new products and services, enabled by new technology, can be adopted rapidly at scale. The government has identified several characteristics of digital markets that may lead to concentration, which suggest that the future development of private money issuance could tend towards a small number of firms taking a significant market share. Although concentration and market power are not inherently harmful and may reflect innovative products and services, they can damage consumer choice, competition and innovation.
• If designed appropriately, a digital pound could complement and support new forms of private digital money and payment services, for example, by acting as the "bridging asset" between different platforms enabling convertibility. By establishing technical standards available to all, it could help ensure interoperability between different platforms.
• The planned research and development work is expected to have important benefits for both the BoE and the FinTech industry even if the eventual decision is not to introduce a digital pound.
• A digital pound may not be best suited for wholesale markets as there are other routes that might, more quickly and effectively, allow for new forms of digital representation ("tokenisation") of central bank money to be used in financial transactions.