Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook January 2025

Fintech and digital assets

UK regulation of cryptoassets

In November 2023, the Conservative government declared its plan to implement the Organisation for Economic Co-operation and Development's Cryptoasset Reporting Framework (CARF) by 2027, along with 47 other jurisdictions. The CARF requires reportable cryptoasset service providers (RCASPs) to collect and report information about their users and transactions to the relevant tax authority. In the UK, the CARF will apply from 1 January 2026, with the first reports due by 31 May 2027.

Crypto Roadmap

In November 2024, the Financial Conduct Authority (FCA) published its Crypto Roadmap, which set out indicative timelines towards the ultimate regulation of cryptoassets generally.

The Property (Digital Assets etc) Bill

On 11 September 2024, the Property (Digital Assets etc) Bill was introduced in Parliament. Once enacted, for the first time in British history, digital holdings – including cryptocurrency, non-fungible tokens such as digital art, and carbon credits – can be considered as personal property under the law. The new law is intended to give legal protection to owners and companies against fraud, while helping judges deal with complex cases where certain types of digital holdings are disputed or form part of settlements.

The government is yet to set out its proposed timing for the implementation of the bill.

Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulations

Alongside the Autumn 2024 Budget, HMRC published the draft Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulations 2025. The draft regulations incorporate CARF rules and outline due diligence, record-keeping and reporting obligations for UK RCASPs. They also require RCASPs to notify users when a report is made and to register with HMRC by specific deadlines. Penalties for non-compliance are included, aligned with those for digital platforms, except where CARF rules differ. The regulations also feature a targeted anti-avoidance rule to prevent arrangements aimed at avoiding obligations.

The final regulations are expected to be made in 2025 to come into force on 1 January 2026.

FCA update on cryptoassets regulation

On 26 November 2024, the FCA published an update on plans to regulate cryptoasset activity, including a roadmap to full cryptoasset-related regulation. Although it is not yet clear when the new regime will come into force, it is expected at some stage in 2026.

A discussion paper was published by the FCA on 16 December 2024 informing on the development of rules for cryptoasset admissions and disclosures and cryptoasset market abuse and aiming to reduce consumer harms and promote confidence and trust in the UK cryptoasset market by:

• improving regulatory clarity so that there are clear and consistent "rules of the game" for firms and consumers;
• ensuring that consumers have the requisite information before buying or selling cryptoassets;
• requiring controls and processes to bring about fair and orderly trading conditions; and
• further reducing risks of money laundering and losses to fraud.

The FCA has invited feedback on its proposals on the regulation of cryptoassests from both UK and international stakeholders by 14 March 2025.

UK regulation of stablecoins used as a means of payment

Under the previous government, HM Treasury had intended to bring forward secondary legislation in early 2024, subject to available parliamentary time. In light of the general election, however, there were few developments in this area. See this Regulatory Outlook for previous developments on this topic.

The publication of the FCA's Crypto Roadmap in November 2024 referred, however, to upcoming developments in respect of fiat-backed stablecoins – namely, the release in the first and second quarter of 2025 of a consultation paper covering the following issues:

• Backing assets.
• Redemption.
• Custody.
• Record-keeping.
• Reconciliations.
• Segregation of assets.
• Use of third parties.
• Prudential considerations, including the introduction of a new prudential sourcebook, covering capital, liquidity and risk management.

Use of AI and machine learning in financial services

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

On 4 November 2024, the FCA published a new webpage on its AI Input Zone, an online feedback platform which forms part of its AI Lab, seeking a wide range of views from different market participants to understand what transformative AI use cases may develop and what the FCA can do to support opportunities for beneficial innovation.

The FCA has encouraged stakeholders to submit responses to these questions by 31 January 2025. Stakeholders can also apply to participate in other elements of the AI Lab that may be of interest, such as the AI Spotlight and the AI Sprint, both of which are being held in January 2025.

See the AI section for more information on UK government policy approach to regulation of AI.

Payments

Safeguarding requirements

FCA Safeguarding Consultation

The Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) impose safeguarding requirements on firms to protect customer funds received for the provision of a payment service or issuance of e-money, known as "relevant funds". The FCA published a consultation paper in September 2024 on changes to the safeguarding regime, following which the FCA has planned to replace the existing safeguarding regime with one more in the style of the Client Assets Sourcebook (CASS).

The proposed changes are to meet the FCA's aims of ensuring firms have a clearer picture of the amount of funds requiring protection, such funds are immediately protected, and – if the worst should happen to a firm and they enter insolvency – that the prompt return of customer funds can take place.

The following changes are proposed to be made to the legislative and regulatory regime:

• Interim stage. Interim handbook rules and guidance to improve compliance with the existing safeguarding requirements in the EMRs and the PSRs by establishing a new chapter 15 in the FCA's CASS sourcebook; and
• End-state stage. Updating the safeguarding requirements of the EMRs and PSRs by way of legislative amendment and implementing further new rules and guidance in CASS Chapter 15, including for relevant funds and assets to be held on trust for customers and for all funds to be safeguarded from the moment they are received from third parties.

To give firms sufficient implementation time, the FCA has proposed an implementation period of six months for the interim rules and 12 months for the end-state rules. Comments on the proposals were invited until 17 December 2024. The FCA plans to publish final interim rules with an accompanying Policy Statement in the first half of 2025.

Independent review of the PESAR

On 12 December 2024, HM Treasury launched an independent review of the Payment and Electronic Money Institution Insolvency Regulations 2021, which introduced the Payment and Electronic Money Special Administration Regime (PESAR). The aim of the PESAR was to provide clarity in the event of an insolvency of a regulated payment service provider (PSP) or electronic money institution, to achieve quicker distributions for customers and a greater level of protections before distributions can be made.

HM Treasury is required to appoint an independent reviewer to assess how PESAR is working in practice. An interim update with initial conclusions is due by September 2025, with a final report – to be subsequently laid in Parliament – due no later than the end of 2025.

Tackling authorised push payment fraud

The new maximum reimbursement limits for victims of Faster Payments authorised push payment (APP) fraud set by the Payment Systems Regulator (PSR) and for APP fraud payments made through the Clearing House Automated Payment System (CHAPS) set by the Bank of England (BoE), came into effect on 7 October 2024.

The PSR has also published guidance to support PSPs in assessing whether an APP scam claim raised by a consumer is reimbursable under the Faster Payments system and CHAPS reimbursement rules.

See this Regulatory Outlook for more details.

Both the PSR and BoE will closely monitor the impact of the new maximum limits and are expected to perform an evaluation of effectiveness after 12 months of operation.

In a related development, the Payment Services (Amendment) Regulations 2024 came into force on 30 October 2024, allowing PSPs to delay the execution of a payment transaction by up to four business days when there are reasonable grounds to suspect fraud or dishonesty. This delay affects outbound payments only: PSPs are already permitted to delay inbound payments under existing anti–money laundering legislation, though new FCA guidance does also deal with delays to inbound payments. 

To supplement this new payments delay legislation, the FCA published a revised approach document on 22 November 2024 with guidance for firms that provides clarity on how the FCA expects PSPs to apply the legislative changes and enables a risk-based approach to payments.

Consumer-facing terms and conditions must be updated to reflect reimbursement rights of consumers by 9 April 2025. In order to provide customers with sufficient notice of the changes, at least two months' advance notice must be provided. PSPs not directly caught by the rules will need to finalise contractual arrangements with third party PSPs through whom they access the relevant payment systems.

Interchange and card scheme and processing fees market reviews

Interchange fees review

In December 2023, the PSR published an interim report on its market review into UK-European Economic Area consumer cross-border interchange fees, initiating a consultation which closed on 31 January 2024. 

The market review aimed to understand the rationale for the fivefold increase in cross-border interchange fees in card-not-present transactions  since the UK left the EU and stopped benefiting from the EU Interchange Fee Regulation.

The PSR's final report was published on 13 December 2024, concluding that the current levels of interchange fees require regulatory intervention by way of price cap. The PSR released a consultation paper on the same day, inviting comments until 7 February 2025 on their proposals, which include adopting a two-stage approach to a price cap remedy:

• Stage 1. An initial, time-limited cap (for a transitional period while an appropriate methodology for determining the most appropriate level of a price cap is developed and implemented) set at 0.2% for debit cards and 0.3% for credit cards.
• Stage 2. A longer-term cap (which may be higher or lower than in stage 1), developed during the Stage 1 period.

Card fees review

On 21 May 2024, the PSR released an interim report on its market review of card scheme and processing fees, initiated due to concerns about high fees.

The PSR has provisionally concluded that the market for scheme and processing services is not functioning well or in the best interests of all users. Key findings include a lack of effective competition in the system, card issuers having higher-than-expected profit margins and overly complex card scheme and processing fees. The PSR aims to publish its final report in the first quarter of 2025.

Consumer finance

Regulation of buy-now pay-later products

The new Labour government has progressed plans to expand the regulatory perimeter to include interest-free "buy now, pay later" (BNPL)  and other currently unregulated short-term interest-free credit products provided by third-party lenders. Once the new rules come into force, BNPL providers and products will likely be subject to a range of new requirements, set out in the FCA rules, including pre-contractual disclosures, creditworthiness assessments and in relation to the form and content of the credit agreement.

There will be exemptions for some agreements where there is limited risk of consumer detriment and where regulation would otherwise adversely impact day-to-day business activities.

In October 2024, HM Treasury published a consultation, which closed on 29 November 2024, alongside a draft statutory instrument, the Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025, expected to come into effect during the course of 2025. See this Regulatory Outlook for details.

While the October 2024 consultation has added greater depth to the government's plans to regulate BNPL, it has indicated that the FCA will have a wide ambit to set out the final rules in its Handbook on matters such as information requirements, affordability and creditworthiness assessments, and complaints handling. Borrowers will be able to take complaints to the Financial Ombudsman Service and firms will be required to embed the Consumer Duty into their BNPL products.

While the processes of BNPL regulation and Consumer Credit Act (CCA) reform may overlap and inform each other, the outcomes of BNPL regulation will not be determinative of the broader regulatory regime put in place through reform of the CCA.

Motor finance

Complaints

The FCA announced a review into whether motor finance customers have been overcharged because of the past use of discretionary commission arrangements (DCAs) in January 2024. They also paused the eight-week deadline for a final response to relevant customer complaints, to prevent disorderly, inconsistent and inefficient outcomes for consumers, as well as knock-on effects on firms and the market, while the FCA determined the best way forward.

In September, this complaint-handling pause was extended, and the FCA now intends to set out the next steps in its review into the past use of DCAs in May 2025. The FCA has also extended the pause to the deadline for motor finance firms (lenders or brokers) to provide a final response to customer complaints regarding motor finance commissions (both DCAs and non-DCAs) until 4 December 2025.

The additional time will also allow the regulator to consider the impact relevant cases in the Court of Appeal, most notably the decision in Johnson v Firstrand Bank Limited t/a Motonovo Finance (see below for further details).

High Court decision

On 17 December 2024, the High Court found in favour of the Financial Ombudsman Service in a judicial review of its decision to uphold a complaint relating to a DCA in a motor finance agreement. Particularly significant is the court's finding that, where a FCA rule and one of the FCA's Principles for Businesses occupy the same territory, compliance with the rule will not automatically mean compliance with a principle, due to the "overarching nature" of the principles.

As a result, a firm could be compliant with FCA rules, yet still be found in breach of a FCA principle. Such a conclusion could have broad implications for regulated firms and extend beyond the context of motor finance commission arrangements.

Broker commissions judgment: Johnson, Wrench and Hopcraft

The Court of Appeal decision in Johnson v Firstrand Bank Limited t/a Motonovo Finance has muddied the waters on fiduciary duties, agency relationships and disclosure of commissions in the motor finance industry – and driven a "coach and horses" through FCA rules and market understanding in relation to credit broking more generally. Osborne Clarke's Future of Financial Services Podcast takes a look at the implications of this decision.

The judgment suggests that a credit broker only has to be "in a position to influence or affect the borrower's decision on finance to be treated as both an agent and a fiduciary of the borrower (encapsulated in the concept of a "disinterested duty"). In other words, a fiduciary duty exists in a wider range of circumstances than previously understood.

On 11 December 2024, the Supreme Court announced that it has granted permission to appeal – a decision welcomed by the FCA. The appeals will be listed in the Hilary term of 2025 (that is, before 16 April 2025).