Fintech, digital assets, payments and consumer | UK Regulatory Outlook June 2024

UK general election: impact on financial services

See our Insight for coverage of what a Labour government might mean for the financial services sector.

BoE speech on opportunities and risks of fintech and AI

On 21 May 2024, the Bank of England (BoE) published a speech given by Randall Kroszner, an external member of the Financial Policy Committee (FPC), on balancing the productivity opportunities of fintech and artificial intelligence (AI) against the potential risks.

Points of interest include the following:

• When innovation is disruptive, it is much more difficult for regulators to know what actions to take to achieve their financial stability goals and what the unintended consequences could be. Recent data may not be helpful, and there may not be a common framework for assessing the likely impact of the innovation or the consequences of regulatory action.
• Regulators should be open to new approaches that might shape these frameworks. These can support safe innovation, as is the intention of the Digital Securities Sandbox. However, fundamentally disruptive innovations, such as AI tools, often involve the potential for extraordinarily rapid scaling that tests the limits of regulatory tools. In these circumstances, a sandbox approach may not be applicable, and policymakers may themselves need to innovate further in the face of disruptive change.
• Explainable AI is a focus of significant research and what we mean by "explainability" may have to evolve; regulators should be engaged in understanding these developments.
• "Misalignment" – the concern that, once AI systems can act in accordance with specific goals, they may begin to become misaligned with humanity’s needs and values in pursuit of their key objective – is an issue regulators will need to grapple with and the FPC is considering. For example, the potential risks emerging from neural networks becoming "deep trading agents" and the potential for their incentives to become misaligned with those of regulators and the public good could be mitigated by training neural networks to respect a "constitution" or a set of regulatory rules that would reduce the risk of harmful behaviour.
• Operational resilience is becoming more important to financial stability as AI and fintech play a greater role in the provision of financial services, as greater adoption of new technology leaves us all open to more risks. A key lesson for regulators and policymakers is the importance of ensuring models do not all operate in the same way.

Following the BoE and Financial Conduct Authority (FCA) AI Public-Private Forum, the regulators are considering establishing a follow-up industry consortium, as part of addressing the need for ongoing dialogue and building relationships.

Impact of wash-up on FOS plans to charge CMCs

On 21 May 2024, a draft version of the Financial Services and Markets Act 2000 (Ombudsman Scheme) (Fees) Regulations 2024 was published, with a draft explanatory memorandum. The draft Regulations would give the Financial Ombudsman Service (FOS) the ability to charge fees to:

• persons authorised by the FCA with permission to carry on regulated claims management activity (claims management companies or CMCs); and
• legal professionals in England, Wales and Scotland carrying out regulated claims management activities.

However, the Regulations were laid prior to the general election being called, and did not survive the "wash-up" period.

On 23 May 2024, the FOS published a consultation paper on how it proposes using these powers, as follows:

• The FOS will charge the CMC or other professional representative referring a case to the FOS that exceeds the three free cases per financial year a maximum case fee of £250.
• If the FOS reaches an outcome on the case that is more favourable to the CMC or other professional representative's client than the one reached by the respondent firm at final response stage, it will reimburse them £175. This means that cases resulting in a favourable outcome will attract a £75 fee. In such cases, the respondent firm will still pay the usual £650 case fee, in keeping with the "polluter pays" principle.
• If the FOS does not reach an outcome on the case that is more favourable to the CMC or professional representative's client than the one reached by the respondent firm at final response stage, the £650 case fee payable by the respondent firm will be reduced by £175 to £475.

The consultation closes on 4 July 2024. The FOS intends to implement the charging regime with effect from 1 October 2024, should the enabling legislation be finalised. Since the regulations would need to be laid again before the new Parliament following the election, it remains unclear whether and when the required legislative amendments will be made and thus whether and when the changes proposed by the FOS will take effect.

PSR interim report on market review into card scheme and processing fees

On 21 May 2024, the Payment Systems Regulator (PSR) published the interim report on its market review into card scheme and processing fees, which is being conducted in response to concerns about high fees being paid by acquirers and issuers. The PSR has been examining the level of these fees to understand whether they, or other factors, indicate the market is not working well, focusing on the two main card schemes operating in the UK.

The PSR has provisionally concluded that the two main card schemes do not face effective competitive constraints, and the market is not working well. The evidence is consistent with a finding that the two main card schemes' margins are higher than would be expected in competitive markets; however, there is insufficient data to reach a firm conclusion on the existence of unduly high prices or excessive profits (and the level of harm arising from these), noting the wide range of possible margins. In addition, the two main card schemes do not consistently provide high-quality information sharing services to acquirers, resulting in their receiving complex or incomplete information on scheme and processing services and fees, with resulting impacts for merchants.

The PSR considers that intervention to address these issues may be appropriate. It is considering potential remedies, including regulatory financial reporting, requiring the card schemes to give reasoning and evidence justifying any price increases, and improved transparency of information available to acquirers and merchants.

The PSR invites comments on the report by 30 July 2024, and plans to publish its final report in Q4 2024.

APPG on Fair Business Banking recommendations on SME access to finance

On 20 May 2024, the All-Party Parliamentary Group (APPG) on Fair Business Banking, a cross-party group with members from the House of Commons and the House of Lords, published a manifesto for improvements to access to finance for small and medium-sized enterprises (SMEs).

The APPG sets out recommendations on SME finance for the next Parliament, including:

• extending the regulatory perimeter to cover commercial lending to small and medium-sized businesses;
• creating a Financial Services Tribunal, replacing the Business Banking Resolution Service, to provide a permanent route for resolving larger and more complex cases;
• extending the threshold of the FOS to allow larger SMEs to refer complaints to it;
• longer term British Business Bank support schemes and support for green finance;
• introducing guidelines for compensation schemes together with an independent arm's-length body to set up and administer schemes, based on specified principles;
• increasing the FSCS depositor protection limit from £85,000 to £250,000 to reduce risk for SMEs, with the average SME deposit in 2023 standing at over £72,000; and
• overhauling the Bank Referral Scheme to bring more banks in scope, with the option of mandating bank participation.