Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook November 2022

Market review into card acquiring services

In October 2022, the Payment Systems Regulator (PSR) published a policy statement (PS22/2) setting out its final decision on remedies to address the concerns raised in its card-acquiring market review, including that the market may not be working well for merchants, and ultimately consumers.

The PSR has mandated the following three remedies:

• Summary boxes containing bespoke key price and non-price information to be sent individually to each merchant and made available in their online account. Merchants use these with new online quotation tools, which providers are required to provide. This helps merchants to compare all available offerings.
• Trigger messages to prompt merchants to shop around and/or switch must be sent by providers of card-acquiring services to their merchant customers and shown prominently in their online account. The timing of these messages is linked to minimum contract term expiry dates or, where contracts are indefinite, they must be provided at least once every 30 calendar days.
• A maximum duration of 18 months for point-of-sale (POS) terminal lease and rental contracts, and maximum one-month notice after any renewal.

The PSR implements the remedies through specific directions:  Specific Direction 14 requires providers of card-acquiring services to provide information to merchants, Specific Direction 15 requires providers of card-acquiring services to provide prompts to merchants and Specific Direction 16 limits the length of POS terminal contracts.

The PSR has also published advice on the format and content of information required under Specific Directions 14 and 15.

The 14 firms subject to the specific directions must implement the remedy relating to POS terminal contracts from January 2023, and the two remaining remedies from July 2023.

Card fees: PSR publishes final terms of reference for two market reviews

On 27 October 2022, the PSR published the final terms of reference for its market reviews into card scheme and processing fees (MR22/1.2) and UK-EEA consumer cross-border interchange fees (MR22/2.2). The PSR has decided to launch the market reviews in the face of concerns about increases in both sets of fees.

• First market study: the PSR wants to understand whether the markets in connection with scheme and processing fees are working well and will examine the levels, structure and types of scheme and processing fees, building on the PSR's findings in its card-acquiring services market review findings. In particular, it intends to examine the extent of barriers to entry and network effects, and whether Mastercard and Visa have a "must take" status for merchants.
• Second market study: the PSR wants to understand why certain UK-EEA cross-border interchange fees for card-not-present transactions using consumer debit and credit cards have increased five-fold since the UK left the EU. The PSR intends to examine the rationale for and the impact of these fee increases and whether the card scheme operators' ability to increase the fees is an indication that the market is not working well. Please see our previous Insight for more information on this issue.

The PSR intends to publish a report setting out its interim conclusions on card scheme and processing fees in Q4 2023 and a final report in Q2 2024. The PSR plans to publish a report setting out its interim conclusions on UK-EEA consumer cross-border interchange fees in Q2/Q3 2023 and a final report in Q4 2023.

While fees charged by the card schemes are the focus of the reviews, participants from across the payments ecosystem would see their bottom lines impacted by changes in the level of scheme/processing fees and cross-border interchange. As customers of the schemes, banks and other players may also receive direct information requests from the PSR as part of the regulator's information gathering and analysis exercise. Firms may wish to start collecting and reviewing relevant internal data and documents, and develop a strategy for engaging with the PSR during the reviews. The studies also represent an opportunity for firms to consider their forward-looking strategy in payments, in light of the economics of the market(s) and the policy agenda.  

Use of AI and machine learning in financial services

Financial services firms are increasingly using artificial intelligence (AI), machine learning and across a range of areas including fraud and money laundering detection, assessing insurance risk, and assessing creditworthiness and affordability. This is likely to continue due to increased availability of data, improvements in computational power, and wider availability of AI skills and resources. 

The key question for financial services is whether AI can be managed through fine-tuning the existing regulatory framework, or whether a new approach is needed.  In that context, the Bank of England, the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) (together, the supervisory authorities) have published a discussion paper on AI and machine learning (ML). The purpose of the discussion paper is to explore how the current UK regulatory framework applies to AI and ML, and to address any identified gaps. The paper also considers how policy can best support further safe and responsible AI and ML adoption, and whether additional clarification of the existing regulatory framework may be helpful. In particular, the supervisory authorities are interested in the additional challenges and risks that AI brings to firms' decision-making and governance processes, and how those may be addressed through the senior managers and certification regime and other existing regulatory tools.

On 9 November 2022, the FCA published a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, on the use of AI. Ms Rusu reminds firms of things they need to consider when using AI, including the need for a firm's governance framework to take a central role and ensuring that firms take responsibility for AI models and the importance of creating a framework for dealing with novel challenges.

Nonetheless, the use of AI in financial services is accelerating, with the largest uptake in the insurance and banking sectors.  Ms Rusu notes that a recent survey published by the Bank of England and the FCA, it was identified that the biggest risk for consumers is data bias and data representativeness, whilst the biggest risk for firms is a lack of AI explainability. In a speech given on 17 November 2022 by Nikhil Rathi, FCA Chief Executive, a number of  use cases were identified for AI as a way of solving issues relating to firms' implementation of the new "Consumer Duty". For example, spotting the signs of vulnerability, tailoring products to individual needs and receiving accurate customer feedback and data.

These AI discussions provide a valuable contribution to this broader policy debate and occur as the UK government looks to publish its delayed white paper on AI regulation. In the interim, a policy paper on a pro-innovation approach to AI regulation was published on 18 July 2022 alongside its AI Action Plan, which is part of the National AI Strategy released in September 2021.

The discussion paper closes for comment on 10 February 2023.

Given the wide-ranging implications of AI, the supervisory authorities are keen to hear from a broad range of stakeholders. This includes firms regulated by the bank, PRA and/or FCA, as well as non-regulated financial services firms, professional services firms (such as accounting and auditing firms), third parties (such as technology companies), trade associations and industry bodies and standard setting organisations. Stakeholders should look out for any responses to this discussion paper and the UK government's future approach to regulating AI.

UK regulation of cryptoassets

On 4 November 2022, the revised Financial Services and Markets Bill was published following the public bill committee stage where a number of amendments were introduced. The bill represents a landmark in post-Brexit financial services legislation, addressing issues such as the approach to retained EU law, changes to the UK financial promotions regime and financial market infrastructure.

The revised bill proposes, among other things, certain amendments to the Financial Services and Markets Act 2000 which, if passed into law, may bring cryptoassets generally within the UK regulatory perimeter and therefore subject to oversight by the FCA. In addition, the broader (technology neutral) definition of "cryptoassets" included in the bill may capture a wider class of digital assets (including, for example, non-fungible tokens) than previously expected.

As part of its proposed measures, the bill would also enhance the powers of law enforcement by enabling them to seize suspected criminal cryptoassets, and the powers of the courts by simplifying the enforcement of orders against defendants' cryptoassets.

This proposal is only the first step in a long road to full regulation of cryptoassets in the UK. The timeline for the bill to pass is unknown: it still needs to go through the House of Lords, before receiving Royal Assent.  However, even if the above amendments to the bill are retained, it would still be necessary for HM Treasury to amend the Financial Promotions Order and the Regulated Activities Order for cryptoassets to be brought within the UK regulatory perimeter. We would expect HM Treasury to engage in a public consultation on these amendments and the FCA to consult on implementation.

Firms will therefore have some time before the precise scope and impact of the bill becomes clear, and any rules come into force. Firms should track these developments closely.

Please see our Insight for more information.

FCA publishes discussion paper on its competition approach for Big Tech firms in UK financial services

On 25 October 2022, the FCA published Discussion Paper 22/5 "The potential competition impacts of Big Tech entry and expansion in retail financial services" (DP22/5).

The FCA notes that Big Tech firms' presence internationally and in UK financial services markets has been increasing, with the potential to grow and change market outcomes quickly. Big Tech firms can provide innovative and efficient products and services. However, in the FCA's view, based on evidence from Big Tech firms' core markets and their expanding ecosystems, competition risks could arise in the future from them rapidly gaining market share, markets "tipping" in their favour, and potential exploitation of market power that would be harmful to competition and consumer outcomes.

The FCA is not proposing any regulatory or policy changes, rather the purpose of DP22/5 is to stimulate a discussion on the potential competition impacts identified using existing research to inform the FCA's approach to Big Tech firms. The FCA wants to hear views about where Big Tech entry is likely to create the biggest competition benefits for consumers and those areas where there is the greatest risk of significant harm if competition develops in a particular way.

The FCA has focused its analysis on four retail sectors: (i) payments; (ii) deposit taking; (iii) consumer credit; and (iv) insurance.

The discussion is also intended to inform the regulator's approach to, and understanding of, Big Tech firms, in the context of the new UK pro-competitive regime for digital markets and those of other jurisdictions such as the EU and the US, the UK's Future Regulatory Framework, and the FCA's new Consumer Duty.

The deadline for comments to DP22/5 is 15 January 2023. The FCA plans to publish a Feedback Statement in the first half of 2023 setting out how it will develop its regulatory approach in response to the feedback received.

Please see our Insight for more information.