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

BoE speech on modernising UK payments

On 15 April 2024, the Bank of England (BoE) published a speech by Sarah Breeden, the Bank of England's Deputy Governor, Financial Stability, which set out how the BoE seeks to deliver trust and support innovation, both as a provider and as a regulator of retail and wholesale money. Ms Breeden also discussed the first-order threats and opportunities facing central banks and the private sector.

Key points on the BoE's work on innovation included the following:

• Stablecoin regulation. Ms Breeden refers to the BoE's November 2023 discussion paper proposing a regulatory regime for stablecoins in retail payments (see this edition of the Regulatory Outlook), which focused on ensuring stablecoin and related systems are as safe as those currently used for retail payments. The BoE received valuable feedback from a range of stakeholders in the crypto, payments and banking sectors. This included some respondents saying that the BoE's proposed requirements would challenge stablecoin issuers' business models and so might effectively bar use of stablecoins at systemic scale. The BoE will consider all feedback received and then consult further on a draft rulebook.
• Potential retail central bank digital currency (CBDC). The BoE has not yet taken a decision on whether to issue a digital pound. Its work over the next two years or so will focus on making a robust and objective assessment of its potential benefits and costs, including operational and technical feasibility. To do this, the BoE will consider the potential design of a digital pound in greater detail, informed by technology experimentation and proofs of concept with the private sector.
• Increased focus on wholesale innovation. The BoE is increasingly focused on wholesale innovation, including how its infrastructure should best evolve to support the settlement of tokenised transactions, to ensure the continued role of central bank money in wholesale payments. The BoE is exploring the benefits of extending the real-time gross settlement (RTGS) system in future to offer synchronised settlement in a variety of assets, by linking the traditional centralised RTGS ledger to other ledgers, including those using distributed ledger technology.
• Payments innovation by banks. The BoE wants to encourage more thinking and action by banks in this space. This includes both how tokenisation might be applied to bank deposits to enhance their functionality across the full range of retail payments use cases, and what interbank payment rails would be needed to support this.
• Forthcoming discussion paper. The BoE aims to publish a discussion paper on innovation in wholesale payments and payments innovation by banks this summer.

FCA feedback statement on potential competition impacts from data asymmetry between Big Tech and financial services firms

Please see the Competition section. 

Treasury Committee report on findings from SME finance inquiry

On 8 May 2024, the House of Commons Treasury Committee published a report on the findings from its inquiry into access for finance for small and medium-sized enterprises (SME) – as of 2023, there were more than 5.55 million SMEs in the UK, compared to around 8,000 large businesses.

The Committee found that confidence among SMEs in accessing finance has fallen, and acceptance rates for business credit have dropped significantly. In addition, the Committee flagged increasing levels of "debanking" (bank account closures) and ineffective recourse for disputes with banks.

The report makes the following recommendations:

• The Prudential Regulation Authority’s introduction of the new Basel 3.1 standards risks tightening conditions for SMEs even further. Any more stringent capital requirements for SMEs should be abandoned.
• The government must find a way to support the 55,000 SMEs currently served by the Business Banking Resolution Service (BBRS). In the Committee's view, the BBRS has been ineffective, is perceived as lacking in independence, and should close as planned. However, SMEs above the Financial Ombudsman Service (FOS) turnover thresholds will need a route to complain about treatment from their bank, and a consultation on a new mechanism should take place by year end 2024.
• The FCA should provide clearer instructions on the use of "risk appetite" and "reputational risk" criteria – banks should not be able to use risk appetite assessments to close accounts.
• The government must conduct annual assessments of the effectiveness of the British Business Bank (BBB). The found that this organisation plays an important and positive role in providing debt and equity solutions to SME, but awareness of the BBB and its schemes is too low.
• The FCA must use its announced review and existing powers to tighten rules around misuse of personal guarantees, and give the FOS the remit to address related business complaints.

Debanking complaints surge in figures published by Treasury Committee

On 21 April 2024, the House of Commons Treasury Committee published a press release and correspondence on debanking complaints.

The figures were set out in a letter sent to the Committee by Abby Thomas, Chief Executive of the FOS. The press release highlights key points from the data provided, including the following:

• The number of complaints received by the FOS related to debanking has increased by 69% since the financial year 2020/21;
• There has been an increase in the proportion of complaints upheld by the FOS: 36% ruled in the complainant’s favour in the most recent year, compared with 27% or below in each of the previous three years; and
• The volume of complaints relating to restricted account closures has almost trebled since 2020-2021 – this refers to cases which involve financial crime concerns, money laundering concerns or where the complaint involves a politically exposed person.

Ms Thomas explains the increases could be due to changes in banks' processes and behaviours, but is also likely to be a result of media interest in the issue.