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

FCA letter to cryptoasset firms on changes to financial promotion rules

On 4 July 2023, the Financial Conduct Authority (FCA) published a letter it has sent to cryptoasset firms warning them they must get ready for changes to the financial promotions regime which come into force on 8 October 2023.

From this date, all firms (including firms based overseas) marketing cryptoassets to UK consumers must comply with the financial promotions regime. The final rules were published in a policy statement (PS23/6) in June 2023.

The letter explains the four routes by which firms can communicate cryptoasset promotions to UK consumers lawfully, and how firms can prepare. This includes considering which of the routes is appropriate, and how the firm will meet the requirements of that route and applicable FCA rules. If a firm decides it will no longer be able to communicate financial promotions to UK customers, it must consider how it will deal with those customers.

The FCA expects the primary way cryptoasset businesses will be able to communicate financial promotions to UK consumers is by registering with the regulator under the Money Laundering Regulations 2017. The letter explains the registration process and warns businesses to allow enough time to make an application and have it assessed.

The FCA warns it will take robust action against anyone illegally promoting to UK consumers, for example by placing firms on its warning list, requesting takedowns of websites, social media accounts and other promotions that are in breach, and enforcement action.

Firms should make sure they confirm receipt of the letter, and consider how the financial promotions regime will impact their business carefully. In addition, to help the FCA understand firms are doing to prepare for the changes, the regulator has asked firms to respond to a survey by 4 August 2023.

Parliamentary inquiry into lending to SMEs and access to finance

On 3 July 2023, the House of Commons Treasury Committee issued a call of evidence, together with an announcement that a cross-party committee of MPs will examine the challenges faced small and medium-sized enterprises (SMEs) seeking finance, the regulation of small business lending, and the role for government in enhancing lending to small businesses (noting that not all SME lending is regulated in the UK). Evidence should be submitted by 5pm on 13 August 2023.

In particular, the committee is seeking evidence on:

• Industry issues. This includes the key challenges SMEs face when seeking finance, identifying channels through which SMEs are most successful when seeking finance, and identifying and improving access to SME finance through innovation. The committee will also look at the impact the Bank of England’s Term Funding Scheme and the government's Alternative Remedies Package (RBS state aid bailout) has had on SME access to finance, as well as the role of credit reference agencies.
• Regulatory issues. This includes the level of SME access to a complaints procedure when in dispute with a lender, whether SMEs should have the same level of consumer protection and deposit insurance limits as retail consumers, and whether commercial lending to SMEs should be regulated. There will also be examination of the LSB's Standards of Lending Practice, the FOS's treatment of small business complaints, and the role of the Business Banking Resolution Service. The committee will look at the impact of the PRA’s proposed Basel 3.1 capital requirements framework, and in particular the proposed removal of the SME support factor, on SMEs in the context of the PRA’s objectives.
• Government policy issues. This includes whether (and how) the government can do more to enhance SME access to finance, and the role and work of the British Business Bank. The committee will also look at the impact of the Covid Bounceback Loan Scheme and the Recovery Loan Scheme on SME finance.

Financial Services and Markets Bill 2022-23 receives Royal Assent

On 29 June 2023, the Financial Services and Markets Bill 2022-23 received Royal Assent. On 7 July 2023, the text of the Financial Services and Markets Act 2023 (FSMA 2023) was published on legislation.gov.uk.

The government describes the FSMA 2023 as a "rocket boost for [the] UK economy" and "central to the government's vision to grow the economy and create an open, sustainable, and technologically advanced financial services sector".

FSMA 2023 will make significant reforms to the regulation of the UK financial services sector, making extensive amendments to existing financial services legislation, and contains many measures intended to address issues arising from Brexit.

Measures include:

• bringing activities facilitating the use of certain stablecoins, where used as a means of payment, into the UK regulatory perimeter;
• establishing a regulatory gateway that authorised firms must pass through before being able to approve the financial promotions of unauthorised firms; and
• introducing the legislative framework for protections for victims of authorised push payment (APP) scams.

Certain provisions in FSMA 2023 enter into force on 29 August 2023, including those relating to cryptocurrencies, cash access services and wholesale cash distribution. Many provisions in the legislation will need to be implemented by the regulators and/or HM Treasury before they start to apply to firms. Work has begun on developing relevant secondary legislation and regulatory rules in some areas, but overall the process is expected to take significant time.

Treasury Committee publishes BoE's follow-up response regarding introducing mandatory reimbursement for APP fraud within CHAPS

On 21 June 2023, the House of Commons Treasury Committee published a follow-up response from the Bank of England (BoE) regarding the introduction of mandatory reimbursement for APP fraud.

The BoE confirms it plans to implement measures for the reimbursement of victims of APP fraud within the CHAPS payment system comparable to those the Payment Systems Regulator (PSR) is proposing for Faster Payments, see the bribery, fraud and anti-money laundering section for more. This means that, when settling consumer payments, CHAPS direct participants will be required to implement mandatory reimbursement via a direction by the PSR to comply with new rules in the CHAPS rulebook.

The BoE explains that, as CHAPS is a predominantly wholesale payment system, CHAPS users are mainly financial market participants or participants making payments for corporate treasury management. There is, therefore, a need to identify the consumer transactions to which the protections should apply, for example payments for house purchases.

The BoE sets out the main features of its model for imbursement, following the approach the PSR has proposed for Faster Payments. As the PSR is still finalising the finer details of the Faster Payments approach, the BoE awaits those before finalising the model for CHAPS. In several areas, it expects the alignment to be close; for example, it anticipates that the forthcoming PSR guidance around the customer standard of caution and gross negligence definition should be applicable to CHAPS, and it also expects to adopt the single definition of an APP scam.

In other areas, the BoE might need to take a different approach for CHAPS; for example, setting the maximum level of reimbursement is a design issue in CHAPS because, unlike for Faster Payments, there is no upper limit on the size of CHAPS payments.

The BoE intends to follow broadly the same timetable as the PSR, so mandatory reimbursement would go live for relevant CHAPS direct participants with retail traffic in Q1 2024.