Fintech, Digital Assets, Payments and Consumer Credit | UK Regulatory Outlook March 2023

FCA publishes its updated Perimeter Report

On 6 March 2023, the Financial Conduct Authority (FCA) published an updated version of its Perimeter Report. The report sets out what the FCA does and does not regulate, describes the specific issues that have been identified around the regulatory perimeter and action the FCA is taking in response. Where the regulator considers that bringing unregulated activities into its remit is likely to prevent harm and lead to better outcomes, it will work with the government to do so.

The FCA has made revisions to the previous version of the report, including:

• Appointed representatives. The FCA outlines the steps it is taking to tackle potential harm from the appointed representatives regime. Among other things, it has intensified supervision of firms that are providing regulatory hosting services and made changes to the authorisation process intended to identify risky business models and higher-risk principals.
• ESG data and ratings providers. The FCA notes that HM Treasury is preparing to consult on bringing ESG data and ratings providers within the FCA's regulatory perimeter. It highlights the work underway concerning the voluntary code of conduct for ESG data and ratings providers.
• Funeral plans. The FCA confirms that, if funeral plan providers are placed into administration, insolvency practitioners may carry out funeral plan contracts, but may not enter into new contracts.
• Deferred payment credit (DPC). The FCA confirms that it intends to consult on conduct standards for the DPC sector (that is, activities relating to buy now, pay later products) that will apply once the sector is brought within the regulatory perimeter. However, the extent of these rules will depend on HM Treasury's legislation covering the scope of firms and activities that will fall within the perimeter.
• Senior Managers and Certification Regime (SM&CR). The FCA notes that, although the Financial Services and Markets Bill 2022-23 enables the extension of the SM&CR to recognised investment exchanges, and credit rating agencies, it does not enable the regime's extension to payments and e-money firms. The FCA sees value in extending the SM&CR to these firms and is exploring possible options with HM Treasury.

Putting customers front and centre will help industry innovate

On 22 February 2023, the FCA published a speech by Sheldon Mills, its executive director for consumers and competition, given at the "Countdown to Implementation of the Consumer Duty" event, on how putting customers front and centre will help the industry innovate.

In his speech, Mr Mills reiterated the importance of the Consumer Duty and why the FCA embarked on it in the first place. He explained that it was designed to set and test higher standards and to reduce and prevent serious harm. As an outcomes-based approach, data and monitoring is key and it is hoped this will give firms the impetus to target their customers more accurately through new technologies and systems. The duty is also intended to reduce customer complaints, cut down costs down the line and boost competition.

The speech also reminded firms of some of the key deadlines, as well as practical steps that they need to take. The duty implementation deadline for open products and services is 31 July 2023, and 31 July 2024 for closed products.

To prepare, over the next five months, firms should share information with their commercial partners and make sure they are on board; this will include the firm's distribution network and wholesalers as well as retailers and any third parties. Mr Mills also advised firms to focus on the areas that will have the biggest impact on outcomes for customers.

Mr Mills flagged that the duty is not retrospective, so it will not mean organisations will be taken to the Financial Ombudsman Service for past actions or omissions so long as they are put right by July 2023 for products or services that are still on offer (or by July 2024 for those that have been withdrawn to new customers).

At every stage of the regulatory life cycle, the FCA will ask firms to demonstrate their business models, actions they have taken and how their culture is refocusing on good customer outcomes.

Finally, the speech highlighted the need, by the end of April, for manufacturers to complete all reviews necessary to meet the four outcome rules (which relate to the governance of products, price and value, consumer understanding and consumer support) and to share information with distributors to help them meet their obligations.

On 21 February 2023, the FCA sent a letter to all the payments firms that it supervises setting out its expectations on how these firms should embed the duty.

FSB publishes G20 Roadmap for enhancing cross-border payments

On 23 February 2023, the Financial Stability Board (FSB) published a report on the G20 Roadmap for enhancing cross-border payments.

In October 2022, the FSB published a prioritisation plan and engagement model for taking the roadmap forward. The plan showed that the roadmap had reached an inflection point and needed to move to implementing practical projects to enhance cross-border payment arrangements to achieve the quantitative targets that had been established. Based on the current analyses and the stakeholders' feedback, the FSB, the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI) and partner bodies have identified three key themes of focus for the next phase of the roadmap:

• Payment system interoperability and extension – the CPMI will convene a forum to exchange information and experiences among interested central banks on developing or upgrading their payment systems. There will also be a G20 workshop on interlinking the faster payments service. The CPMI (in consultation with public and private sector stakeholders) will also finalise the requirements for service level agreements/schemes that stakeholders can use as a starting point when establishing agreements.
• Legal, regulatory and supervisory finalising frameworks – an FSB working group on bank and non-bank supervision will develop recommendations, as needed, for strengthening consistency of the application of regulation and supervision to banks and non-banks providing cross-border payment services in a way that is proportional to their respective risks. The theme will also cover updating anti-money laundering rules and will include enhancing the Financial Action Task Force rules on wire transfers.
• Cross–border data exchange and message standards – the FSB will develop recommendations for public consultation, for promoting alignment and interoperability across data frameworks applicable to cross-border payments. It will also cover finalising the ISO 20022 harmonisation requirements and promoting their real world implementation and improving application programming interface harmonisation for cross-border payments use.

This latest report details the specific actions that will be taken under the three priority themes to move the roadmap forward and achieve the targets by the 2027 target date.

CPMI consults on proposed ISO 20022 harmonisation requirements

On 1 March 2023, the CPMI published a consultative report on the harmonisation of ISO 20022 requirements for cross-border payments.

It explains that the proposed harmonisation requirements provide overarching guidance for global and domestic market practices guidelines to ensure that the ISO 20022 messaging standard is consistently used to facilitate faster, cheaper, more accessible and more transparent cross-border payments.

The 15 proposed requirements are divided into three sections: Block A – fundamentals, Block B – transparency; and Block C – structured and coded data. They were developed by a joint task force established by the CPMI and the SWIFT Payments Market Practice Group.

The CPMI will revise its report in response to feedback received during the consultation and will deliver the final report to the Indian G20 Presidency by the end of 2023. It intends that the requirements should take effect in November 2025, which would align with SWIFT's scheduled date for removing the ability to send cross-border MT payment messages over its network.

The deadline for comments is 10 May 2023.

European Supervisory Authorities warn consumers on risks of cryptoassets

On 17 March 2022, the European Supervisory Authorities (ESAs) published a joint document warning consumers that many cryptoassets are highly risky and speculative, and are not suited for most retail customers to invest in or use as a means of payment or exchange.

The ESAs provide a list of questions consumers should ask themselves if they are considering buying cryptoassets or related products and services. They also provide brief explanations of what they perceive to be the key risks, which include:

• Extreme price movements
• Misleading marketing
• Absence of protection
• Product complexity
• Market manipulation, lack of price transparency and low liquidity
• Fraud

The ESAs note growing consumer activity and interest in cryptoassets, including virtual currencies and the emergence of new types of cryptoassets and related products that claim to generate high or fast returns (or both). These include non-fungible tokens, derivatives with cryptoassets as underlying, unit-linked life insurance policies with cryptoassets as underlying and decentralised finance (DeFi) applications.

They refer to the European Commission's proposed MiCA (Markets in Crypto-Assets regulation) regime, which provides a framework for the regulation and supervision of issuers and providers of services for cryptoassets. However, they remind consumers that the proposed regulation remains subject to the outcome of the co-legislative process, and consumers will not benefit from any of the safeguards in that proposal until it is adopted and applies.

JMLSG publishes final revisions to its guidance

On 6 March 2023, the Joint Money Laundering Steering Group published final amendments to its guidance. The following revised parts of the guidance have been made available:

• Part II Sector 5 (Wealth management).
• Part II Sector 6 (Financial advisers, including financial planners).
• Part II Sector 11A (Consumer credit providers).
• Part II Sector 13 (Private Equity).
• Part II Sector 22 (Cryptoasset exchange providers and custodian wallet providers).
• Part I Chapter 6 Paragraphs 6.70 and 6.71 (on bringing a complaint to and handling it by the Financial Ombudsman Service).

These final revisions are now awaiting HM Treasury approval.

On 17 March 2023, the JMLSG published a press release announcing the publication of revisions to Part II of its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance for the financial services sector.

The finalised revisions relate to chapters 8 (Non-life providers of investment fund products) and 9 (Discretionary and advisory investment management) of Part II of the guidance. The revised guidance has been submitted to HM Treasury for ministerial approval.