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

PSR policy statement on mandatory reimbursement requirement for APP fraud

On 7 June 2023, the Payment Systems Regulator (PSR) published a policy statement on a new reimbursement requirement within the Faster Payments system to fight authorised push payment (APP) fraud (PS23/3). Annexes 3 and 4 to PS23/3 have been published separately.

Respondents to the earlier consultation (CP22/4) broadly supported further action to prevent APP fraud. However, while consumer groups strongly supported the policy proposals, industry expressed mixed views on the detail, raising concerns about disproportionate negative impacts on competition, customers and innovation. The PSR has made some changes to its policy in response.

The PSR outlines the new mandatory reimbursement requirement for payment firms and explains how it will work in practice. Among other things, all payment firms will be incentivised to take action, with both sending and receiving firms splitting the costs of reimbursement 50:50. Customers will be better protected under minimum standards, with most APP fraud victims being reimbursed within five business days, and additional protections in place for vulnerable customers.

The PSR will consult in July 2023 on the draft legal instruments to put the reimbursement requirement in place, and in August 2023 on the maximum level of reimbursement and claim excess, as well as additional guidance on the customer standard of caution. In October 2023, it will carry out a further consultation on the legal instruments.

By the end of 2023, the PSR will publish all legal instruments, the claim excess and maximum level of reimbursement, and additional guidance on the customer standard of caution. The new requirements will come into force in 2024 – the PSR will consult on the start date, but expects the industry to start work implementing the new requirement now.

The Financial Services and Markets Bill 2022-23 will allow the PSR to direct firms to reimburse customers. After it receives Royal Assent, the PSR will be able to enforce its requirements on firms.

Financial promotion rules for cryptoassets

On 7 June 2023, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (SI 2023/612) was published together with an explanatory memorandum. The order expands the scope of the financial promotion restriction in section 21 of the Financial Services and Markets Act 2000 by amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) to include financial promotions in respect of certain cryptoassets.

The order, together with relevant UK Financial Conduct Authority (FCA) rules, will provide for the regulation of in-scope cryptoasset financial promotions. The order came into force on 8 June 2023 for the purpose of enabling the FCA to make rules and give guidance, and will come into force on 8 October 2023 for all other purposes.

On 8 June 2023, the FCA published a policy statement containing near-final financial promotion rules for cryptoassets (PS23/6) together with a guidance consultation on cryptoasset financial promotions (GC23/1) and a press release.

In PS23/6, the FCA summarises the feedback to its January 2022 consultation (CP22/2) relating to cryptoassets. The FCA is mainly proceeding with the proposals as consulted on, although it has made some targeted changes to align the rules for cryptoassets with the final rules for other high-risk investments. The rules will take effect from 8 October 2023.

In GC23/1, the FCA outlines its proposals for non-Handbook guidance on cryptoasset financial promotions and sets out the draft text of this guidance. It is producing the new guidance to ensure that firms understand its expectations around the requirement that financial promotions are fair, clear and not misleading. Comments can be made on GC23/1 until 10 August 2023.

UK government committee calls for consumer trading in unbacked cryptoassets to be regulated as gambling

On 17 May 2023, the House of Commons Treasury Committee published a report on regulating cryptoassets, focusing on the government's approach and the implications for consumers and businesses; the report does not cover all aspects of the committee's inquiry, including central bank digital currencies.

The committee's conclusions and recommendations include the following:

• It recognises the potential for some forms of cryptoassets and underlying technologies to benefit financial services and markets. The most convincing use case it has come across is the potential for cryptoasset technologies to improve the efficiency and reduce the cost of making payments, especially cross-border and in lower income countries with less developed financial sectors. An effective regulatory framework would support development of such technologies in the UK, while mitigating some of the risks. The committee therefore welcomes the government's proposals for regulating cryptoassets used in financial services.
• It notes that the FCA faces challenges in implementing existing and proposed crypto regulations; it is important that the government and regulators strive to keep pace with developments, including by ensuring the FCA's authorisations gateway is open and effective, so that potential productive innovation is not unduly constrained.
• It notes that, regardless of the regulatory regime, the price volatility and absence of intrinsic value of unbacked cryptoassets means they will pose significant risks to consumers. Furthermore, it is concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a "halo effect" that leads consumers to believe this activity is safer than it is.
• It strongly recommends that the government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.

MiCA Regulation and recast revised WTR published in EU Official Journal

On 9 June 2023, the following Regulations were published in the Official Journal of the European Union:

• Regulation (EU) 2023/1114 on markets in cryptoassets and amending Regulations (EU) 1093/2010 and (EU) 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (MiCA); and
• Regulation (EU) 2023/1113 on information accompanying transfers of funds and certain cryptoassets and amending Directive (EU) 2015/849 (recast revised WTR).

MiCA creates a regulatory regime for cryptoassets that are not already subject to European financial services regulation. The regulation enters into force on 29 June 2023, and applies from 30 December 2024, except for provisions relating to the development or adoption of Delegated Acts and various regulatory technical standards and implementing technical standards, which apply from 29 June 2023, and provisions relating to issuers of asset-reference tokens and e-money tokens, which apply from 30 June 2024. Please see our Insight for more detail.

The recast revised WTR, among other things, extends the scope of rules on information accompanying transfers of funds to cover transfers of cryptoassets made by cryptoasset service providers. The regulation enters into force on 29 June 2023 and applies from 30 December 2024, on which date the revised WTR (Regulation (EU) 2015/847) will be repealed.

ESRB report on cryptoassets and DeFi

On 25 May 2023, the European Systemic Risk Board (ESRB) published a report on the systemic implications of, and policy options for, cryptoassets and decentralised finance (DeFi).

The report concludes that, while the past year has been turbulent for cryptoassets and DeFi, systemic implications have not materialised; there are few links and services being provided to traditional finance and the economy. However, the ESRB indicates that risks could materialise if the interconnectedness between cryptoasset markets and the traditional financial system increases over time, connections are not identified before they cause problems, and/or if similar technologies are adopted in traditional finance.

The ESRB proposes policy options to gain a better understanding of developments in cryptoassets and their potential financial stability implications, which could inform future regulatory initiatives. These focus on:

• Strengthening monitoring capacity;
• Identifying and assessing risks from cryptoassets conglomerates and leverage using cryptoassets, and identifying potential actions to mitigate these risks (in particular taking account of market developments following the application of MiCA); and
• Monitoring market developments to ensure potential risks can be identified, assessed and mitigated, with a focus on operational resilience, DeFi, and cryptoasset staking and lending.

In the UK, HM Revenue & Customs is consulting on changing the tax treatment of DeFi lending and staking of cryptoassets – for more detail, please see our Insight.

IOSCO consults on policy recommendations for crypto and digital asset markets

On 23 May 2023, the International Organization of Securities Commissions (IOSCO) published a consultation report on policy recommendations for crypto and digital asset (CDA) markets, which closes to responses on 31 July 2023.

IOSCO sets out 18 CDA recommendations that have been developed by its Fintech Taskforce in accordance with its cryptoasset roadmap, and which cover the following six key areas:

1. Conflicts of interest arising from vertical integration of activities and functions.
2. Market manipulation, insider trading and fraud.
3. Cross-border risks and regulatory co-operation.
4. Custody and client asset protection.
5. Operational and technological risk.
6. Retail access, suitability and distribution.

Although the CDA recommendations are not directly addressed to cryptoasset market participants, IOSCO strongly encourages cryptoasset service providers (CASPs) and all participants in cryptoasset markets to consider the expectations and outcomes they contain carefully, with the related supporting guidance, in the conduct of regulated and cross-border activities.

IOSCO intends to finalise the CDA recommendations in early Q4 2023.

EBA consults on changes to AML and CTF risk factors guidelines under MLD4 to include cryptoasset service providers

On 31 May 2023, the European Banking Authority (EBA) published a consultation paper on proposed changes to its guidelines on customer due diligence and the factors firms should consider when assessing money laundering (ML) and terrorist financing (TF) risk associated with business relationships and occasional transactions under the Fourth Money Laundering Directive (MLD4). The consultation closes on 31 August 2023.

The EBA is proposing to extend the scope of the guidelines to CASPs. The new guidelines:

• Highlight risk factors that reflect specific features of cryptoassets and CASPs, which should be considered by credit and financial institutions when entering into business relationships with CASPs.
• Emphasise the need for secure remote onboarding tools.
• Provide further guidance for credit and financial institutions when entering into business relationships with CASPs established in a third country.
• Provide sector-specific guidance for CASPs explaining factors that increase and reduce ML and TF risk that CASPs should consider when assessing risks associated with their customer business relationships.
• Provide guidance on mitigating measures CASPs should take where the risk is either increased or reduced.

The EBA states in an accompanying press release that these guidelines will be complemented with amendments to the guidelines to prevent the abuse of fund transfers for ML and TF purposes, and new guidelines on policies and procedures for compliance with restrictive measures.

European Commission amends list of high-risk third countries under MLD4

On 17 May 2023, the European Commission adopted a Delegated Regulation that amends the list of high-risk third countries with strategic anti-money laundering (AML) and counter-terrorist financing (CTF) deficiencies under MLD4.

The Delegated Regulation will amend the list by:

• Adding third countries identified as having strategic AML and CTF deficiencies, specifically Nigeria and South Africa.
• Removing third countries that no longer present strategic AML and CTF deficiencies, specifically Cambodia and Morocco.

The Delegated Regulation will be submitted to the Council of the EU and the European Parliament for scrutiny. If neither objects, it will enter into force 20 days after it is published in the Official Journal of the European Union.