Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook February 2025

Fintech and digital assets

Treasury Committee launches inquiry into AI in financial services 

The House of Commons Treasury Committee launched an inquiry into artificial intelligence (AI) in financial services and published a related call for evidence on 3 February. 

Evidence is welcomed until 17 March 2025, on the following: 

• How AI is currently used in different sectors of financial services and how may change in the next 10 years.
• The extent to which AI can improve productivity in financial services.
• The risks to financial stability arising from AI and potential mitigation.
• The benefits and risks to consumers arising from AI, particularly for vulnerable consumers.
• How the government and financial regulators can strike the right balance between opportunities offered by AI, while protecting consumers and mitigating against threats to financial stability. 

ESMA makes statement on non-MiCA compliant tokens 

The European Securities and Markets Authority (ESMA) published a statement on 17 January addressing the provision of cryptoasset services in relation to asset-referenced tokens (ARTs) and electronic money tokens (EMTs) that are non-compliant under the EU's markets in cryptoassets (MiCA) regulation. 

Cryptoasset service providers (CASPs) operating a trading platform should stop making all cryptoassets that would qualify as ARTs and EMTs – but for which the issuer is not authorised in the EU (non-MiCA compliant ARTs and EMTs) – available for trading. 

To mitigate potential disruptions to the cryptoassets markets, ESMA advises that national competent authorities should ensure compliance by CASPs as soon as possible, and no later than the end of the first quarter of 2025.

Payments

Bank of England lays out initial thoughts on a digital pound 

The Bank of England (BoE) published a design note on 14 January outlining its initial thinking on the potential aims, scope and focus areas of a digital pound blueprint. The BoE and HM Treasury are exploring the possibility of a digital pound – a digital complement to banknotes – which they believe could "offer households and businesses another way to make and receive payments, in step with an increasingly digital economy". 

This was published alongside a progress update on the digital pound and the payments landscape.  

The BoE has welcomed feedback, via email, on the considerations set out in the design note. Once the design phase is complete and taking account of developments in the wider payments landscape, the BoE and the government will decide whether to proceed with building a digital pound (which would require primary legislation). 

Payment Systems Regulator five-year strategy update 

The Payment Systems Regulator (PSR) published a strategy update on 16 January, having originally set out its five-year strategy in January 2022.  

In a stakeholder engagement factsheet published alongside the strategy update, the PSR made a number of significant points including on the completion of work that is underway to protect users and promote competition and innovation.  

The PSR is to embed fully its authorised push payment (APP) fraud reimbursement requirements, including commissioning an independent review, and deliver the outcomes from its card market reviews. It will work closely with the Financial Conduct Authority (FCA) to enable it to take forward work on the overall framework for commercial "open banking" payments, focusing on the initial phase of variable recurring payments. 

The regulator will also work with the BoE to upgrade the Faster Payments system and the reform of Pay.UK, as well as assessing long-term retail infrastructure needs. 

It will also look to sharpen its focus on competition and innovation in payments systems, supporting economic growth and enabling the ecosystem of the future. 

The PSR, in a related press release, stated that it will work even more closely with the FCA, BoE and other authorities to deliver positive outcomes. The PSR added that the outcome of the review also reflects trends in payments (domestic and global), the government's growth mission and the impact of the National Payments Vision. 

Government introduces the Public Authorities (Fraud, Error and Recovery) Bill  

The Public Authorities (Fraud, Error and Recovery) Bill was presented to Parliament by the Department for Work and Pensions (DWP) on 22 January and given its first reading. 

The bill gives DWP officials the power to request access to suspected benefit fraudsters bank accounts in an effort to recover fraudulent or incorrect benefit payments. UK Finance has raised concerns regarding the impact the proposals could have on the UK’s growth and competitiveness and firms' legal obligations to depositors under the Consumer Duty. 

FCA and PSR set out next steps for open banking 

On 23 January 2025, the FCA and the PSR provided an update on open banking. 

These included confirmation of the benefits of variable recurring payments (VRPs), particularly by allowing consumers and businesses greater control over making and receiving payments. 

Open Banking Limited will play a significant role in establishing an independent central operator to coordinate how VRPs are made, to encourage "significant progress" in 2025. 

During 2025, live services will be available for consumers to make recurring payments to utility companies, government and financial services firms. 

The regulators also confirmed that they will continue to work together, overseen by a joint steering committee.  

PSR statement of policy on cost benefit analysis framework 

The PSR published a statement of policy on 31 January on its cost benefit analysis (CBA) framework. This explained its approach to CBA and how the framework helps develop policies with a positive impact.  

The PSR consulted on a draft of the statement of policy in September 2024. It received two substantive written responses, including from UK Finance, which it has published in a separate document. Respondents largely supported the general principles set out in the consultation. The PSR has made some amendments to the draft version of the statement to reflect certain comments. 

FCA publishes portfolio letter for payments firms 

The FCA has published a portfolio letter sent on 3 February to firms supervised under its payments portfolio, setting out its priorities for supervision, and highlighting its concerns around ongoing risks of harm to consumers and financial system integrity. 

The FCA places clear responsibility on senior management (and CEOs in particular) to digest the regulator's areas of concern, understand their firm's corresponding position and act where needed.  

The regulator outlined three main priorities. Firstly, effective competition and innovation that meets customers' needs. The FCA is concerned that some new and innovative products do not always result in firms acting in their customers' best interests. It encourages firms to seek support through its innovation hub and its early- and high-growth support function and to attend upcoming FCA "tech and policy sprints". 

The FCA also reiterated the message that the Consumer Duty will continue to be monitored and reviewed. The FCA is also focusing on foreign exchange pricing and the clarity of the information that firms provide for consumers to understand the overall cost of using these service. 

Secondly, it wants no compromise on financial system integrity. While it noted improvements, the FCA said that controls over financial crime could be enhanced further, especially governance arrangements and internal reporting mechanisms. 

It also stated that firms should "show the same diligence" in dealing with unauthorised fraud as they should do in respect in dealing with APP fraud. Given the impending implementation of its "operational resilience" regime on 31 March, the FCA reminded firms of the need to have appropriate governance, reporting and systems and controls in place to avoid the unavailability of important business services. 

Thirdly, it said it wanted firms to keep customers' money safe. In relation to safeguarding, the FCA highlighted specific issues around the appropriate identification of relevant funds – when funds need to be safeguarded or not. It emphasised the need for up-to-date books and records, with daily reconciliations and notification to the FCA where material adverse findings are made in a safeguarding audit. An it noted the need, when using the insurance method, of considering the impact of changes in availability or cost of appropriate policies. 

The FCA said that firms can expect final interim rules, following on from its safeguarding consultation in 2024, to be published "mid-2025". 

Consumer finance

Supreme Court sets hearing date for appeal in Johnson vs FirstRand Bank 

On 19 December 2024, the Supreme Court confirmed that the appeal in the Court of Appeal decision Johnson v FirstRand Bank Ltd (London Branch) t/a Motonovo Finance [2024] EWCA Civ 1282, which relates to three appeals (Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd), will take place between 1 and 3 April 2025. 

FCA response to Financial Services Regulation Committee letter on motor finance judgment 

The FCA published a letter on 17 January sent to the House of Lords Financial Services Regulation Committee relating to the Court of Appeal judgment on motor finance commission in Johnson v FirstRand Bank Ltd (London Branch) (t/a Motonovo Finance) [2024] EWCA Civ 1282. 

In the letter, the regulator confirmed that the most relevant FCA rules and principles governing discretionary and fixed commissions include various provisions of the Consumer Credit Sourcebook (principles 6-8) and, more generally, the Consumer Duty. 

It did not seek legal advice on the specific issue of the relevance of disinterested or fiduciary duties with regard to formulating (and amending) the rules providing for commission disclosure and the ban on discretionary commission arrangements. 

The FCA will consider whether intervention is required once the Supreme Court has settled the law in this area. 

FCA publishes proposed summary grounds of intervention in Supreme Court motor finance appeals 

On 20 January, the FCA published its proposed summary grounds of intervention in support of its application to intervene in the appeals against the Court of Appeal's decision in Johnson v FirstRand Bank Ltd (London Branch) t/a Motonovo Finance [2024] EWCA Civ 1282, due to be heard together from 1 to 3 April 2025. 

The FCA said that it will be able to provide the court with "significant, independent and non-duplicative assistance" particularly in relation to the proper approach to the interpretation of FCA rules and related legislation, the interaction between private law remedies and the regulatory framework, and the broader context of the motor finance and related consumer markets. 

The regulator set out the proposed scope of its submissions in section C and sought permission to intervene both in writing and orally for up to one hour in the three-day hearing. 

HM Treasury intervenes in motor finance case 

The UK chancellor, Rachel Reeves, revealed plans on 22 January to intervene in the appeals against the Court of Appeal's decision in Johnson v FirstRand Bank Ltd (London Branch) t/a Motonovo Finance [2024] EWCA Civ 1282, in a bid to protect car loan providers from potential multibillion-pound payout. 

This followed warnings from HM Treasury officials that the issue could harm the UK's business reputation. "We want to see a fair and proportionate judgment that ensures compensation to consumers that is proportionate to the losses they have suffered, and allows the motor finance sector to continue playing its role in supporting millions of motorists to own vehicles," an HM Treasury spokesperson said. 

HM Treasury then provided UK Finance with its Supreme Court submission, which sets out its concerns regarding potential ramifications of the ruling. 

The ruling affects the reputation of the UK as a place to do business, HM Treasury argued, and so indirectly impacts growth by abruptly changing the way the FCA and industry understood law and so makes the UK an uncertain place to do business. 

Also, by having a serious impact on the motor finance industry, the submission said that the ruling would also have implications for the availability of finance to consumers (both in lending volumes and choice of lenders). 

The submission referenced the potential impacts beyond motor finance and states that HM Treasury is best placed to assist with considerations of any wider effects. 

The submission urged the Supreme Court's decision to reflect the regulatory framework, that is, the FCA's rulebook. It stated that should any remedies be required, they must be commensurate to the harm experienced.