Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook September 2023

HM Treasury response to initial consultation on reform of Consumer Credit Act

On 11 July 2023, HM Treasury published a response to its initial consultation on reforming the Consumer Credit Act 1974 (CCA). The consultation was published in December 2022 as part of the Edinburgh Reforms. The responses were all supportive of change, although stakeholders differed as to how reform should be achieved.

Given the widespread support, the government plans to move forward with overhauling the CCA. It intends to develop proposals that move the majority of the CCA into the Financial Services and Markets Act 2000 (FSMA) model, which will involve repealing much of the CCA and recasting it in the Financial Conduct Authority's (FCA) rulebook.

HM Treasury consultation and call for evidence on cold calling ban for consumer financial services and products

On 2 August 2023, HM Treasury published a consultation and call for evidence on a cold calling ban for consumer financial services and products. The consultation closes on 27 September 2023.

The government announced in its fraud strategy (May 2023) that it would extend the pensions cold calling ban to cover all consumer financial services and products. The consultation explores how best to design and implement the ban; in particular, it considers the scope of the ban in terms of the type of communications, and the financial services and products, to be captured.

The ban will work alongside other government measures to challenge and tackle fraudulent marketing more widely, such as the Online Advertising Programme, the progression of the Data Protection and Digital Information Bill, and the launch of an Online Fraud Charter.

HM Treasury response to consultation on payments regulation and systemic perimeter

On 7 August 2023, HM Treasury published a consultation response to its consultation on payments regulation and the systemic perimeter, which sets out its policy decisions together with a summary of the feedback.

HM Treasury confirms that it will:

• legislate to reform the systemic payments perimeter of the Bank of England (BoE), as set out in Part 5 of the Banking Act 2009. As these reforms will require an Act of Parliament, HM Treasury will publish a further statement on its legislative approach;
• set out its next steps on the extension of the Senior Managers and Certification Regime (SM&CR) to recognised systemic payments entities, payment services providers and e-money institutions once its broader review of the SM&CR has finished;
• make secondary legislation to reform the Payment Systems Regulator's (PSR) payment system access framework that will revoke the framework set out in Regs 102-104 of the Payment Services Regulations 2017;
• publish a policy statement on its legislative approach to the framework for the PSR set out in the Financial Services (Banking Reform) Act 2013, as these reforms will also require primary legislation.

PSR consults on APP fraud maximum reimbursement level for FPS and CHAPS and on consumer standard of caution for APP fraud

On 15 August 2023, the PSR published:

• a consultation paper (CP23/6) on the value of the excess and maximum reimbursement level for Faster Payments (FPS) and CHAPS; and
• a consultation paper (CP23/7) on its proposed approach to the consumer standard of caution and the draft guidance it intends to publish alongside it.

These consultations relate to the PSR's broader authorised push payment (APP) fraud reimbursement requirements set out in a policy statement (PS23/3) published in June 2023. Comments to CP23/6 and CP23/7 could be made until 12 September 2023.

The PSR expects to publish the final value of the excess and maximum reimbursement level by the end of 2023, together with additional guidance on the consumer standard of caution. The requirements will come into force in 2024.

In PS23/3, among other things, the PSR confirmed that sending banks will have the option to apply a claim excess under the new reimbursement requirements, except in cases where the consumer is vulnerable. Although there will be no minimum threshold for claims, there will be a maximum limit. In CP23/6 the PSR was seeking views on the most appropriate way of structuring a claim excess. This includes whether an excess should be a fixed amount (similar to an insurance claim excess) or a percentage of the reimbursement claim amount.

HM Treasury responds to Treasury Committee report calling for cryptoassets to be regulated as gambling

On 20 July 2023, the House of Commons Treasury Committee published HM Treasury's response to its report on regulating cryptoassets. In its May 2023 report, the committee recommended that the government regulate retail trading and investment activity in unbacked cryptoassets as gambling, rather than as a financial service.

HM Treasury welcomes the committee's recommendation that a balanced approach should be taken to supporting the development of cryptoasset technologies. However, it disagrees with the committee's recommendation and re-affirms the government's intention to regulate retail trading in unbacked cryptoassets as a financial service. The response states that this is consistent with the government's approach, which is aimed at creating the conditions for safe innovation and competition while managing risks, especially to consumers.

FSB final framework for regulating cryptoasset activities

On 17 July 2023, the Financial Stability Board (FSB) published its final framework for the international regulation of cryptoasset activities. The framework consists of two sets of recommendations:

• High-level recommendations for the regulation, supervision and oversight of cryptoasset activities and markets.
• Revised high-level recommendations for the regulation, supervision and oversight of global stablecoin arrangements.

The FSB has also published a summary of responses to the October 2022 consultations and set out the main changes made to the final recommendations to address them. In light of events over the past year, the FSB has strengthened both sets of high-level recommendations in three areas: ensuring adequate safeguarding of client assets, addressing risks associated with conflicts of interest and strengthening cross-border cooperation.

The recommendations focus on addressing risks to financial stability and do not comprehensively cover all specific risk categories concerning cryptoasset activities. The FSB has also confirmed that central bank digital currencies, envisaged as digitalised central bank liabilities, are not subject to the recommendations.

BIS report on elements and risks of crypto ecosystem

On 11 July 2023, the Bank for International Settlements (BIS) published a report on the crypto ecosystem that it has submitted to the G20 Finance Ministers and Central Bank Governors ahead of its July 2023 meeting.

The report reviews the key elements of the crypto ecosystem and assesses its structural flaws. It also highlights the risks that it poses and considers options for addressing them. In addition, the report identifies data gaps and discusses ways to alleviate them. The report concludes that crypto's inherent structural flaws make it unsuitable to play a constructive role in the monetary system.

JMLSG consults on new cryptoasset transfer guidance and revises guidance on managing impersonation fraud risk

The Joint Money Laundering Steering Group (JMLSG) has consulted on proposed amendments to its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance for the financial services sector, relating to cryptoasset transfers. Comments could be made until 25 August 2023.

In particular, the JMLSG consulted on chapter 22 of Part II of its guidance, relating to cryptoasset exchange providers and custodian wallet providers. On 31 August 2023, the JMLSG published a revised version of chapter 22 and a new Annex 22-I on cryptoasset transfers, together with a press release.

This change reflects amendments which the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022 have made to the Money Laundering Regulations 2017 (MLRs 2017). A new Part 7A MLRs 2017 implements the updated version of the Financial Action Task Force's recommendation on information sharing requirements for wire transfers (recommendation 16, known as the "travel rule"), which extends the recommendation to cryptoasset transfers. Part 7A MLRs 2017 came into force on 1 September 2023.

In general terms, cryptoasset transfers will have to be accompanied by certain identifiable information on the originator (the person who owns and allows the cryptoasset transfer) and the beneficiary (the intended recipient of the cryptoasset).

On 1 August 2023, the JMLSG published a press release announcing that it has revised paragraph 5.3.89 of Part I, which provides guidance on managing the risk of impersonation fraud. The text of the revised paragraph, which has been submitted to HM Treasury for ministerial approval, has also been published.

FCA statement on travel rule expectations for cryptoasset businesses

On 17 August 2023, the FCA published a statement on its expectations for UK cryptoasset businesses complying with the travel rule.

The FCA expects firms to take all reasonable steps and exercise all due diligence to comply with the travel rule. In particular, firms:

• Will remain responsible for achieving compliance with the travel rule when using third-party suppliers.
• Should fully comply with the travel rule when sending or receiving a cryptoasset transfer to a firm that is in the UK or in any jurisdiction that has implemented the travel rule.
• Should regularly review the implementation status of the travel rule in other jurisdictions and adapt their business processes as appropriate.

EBA consults on first set of RTS and ITS under MiCA

On 12 July 2023, the European Banking Authority (EBA) published the following consultation papers on its first set of regulatory technical standards (RTS) and implementing technical standards (ITS) under the Regulation on markets in cryptoassets (MiCA):

• Draft RTS on information to be contained in an application for authorisation to offer to the public and to seek admission to trading of asset-referenced tokens and draft ITS on standard forms, templates and procedures for the information to be included in the application (EBA/CP/2023/15) (Article 18(6) and (7) of MiCA).
• Draft RTS to specify the requirements, templates and procedures for handling complaints (EBA/CP/2023/13) (Article 31 of MiCA).
• Draft RTS on the detailed content of information necessary to carry out the assessment of a proposed acquisition of qualifying holdings in issuers of asset-referenced tokens (EBA/CP/2023/14) (Article 42(4) of MiCA).

The deadline for comments is 12 October 2023.

Further, on 12 July 2023, the EBA published a statement in which it encourages timely preparatory steps towards the application of MiCA to asset-referenced tokens (ARTs) and e-money tokens (EMTs).

The EBA explains that MiCA will regulate (among other things) the activities of offering to the public or seeking admission to trading of ARTs and EMTs, and issuing those tokens (ART/EMT activities). The regulation will take effect from 30 June 2024 (the application date). Before the application date, offering to the public or seeking admission to trading of ARTs and EMTs is governed by any applicable national law (including, in respect of EMTs, measures to transpose the Second Electronic Money Directive).

The statement is aimed at competent authorities and financial institutions and other undertakings that intend to commence, or have commenced, ART or EMT activities before the application date. The EBA has also published a template that institutions intending to carry out, or carrying out, ART/EMT activities can use to communicate information about the token, on a timely basis, to the relevant competent authority.

ESMA consults on first set of RTS and ITS under MiCA

On 12 July 2023, the European Securities and Markets Authority (ESMA) published a consultation paper on its first set of RTS and ITS under MiCA. The first consultation package covers five RTS and two ITS on:

• The notification by certain financial entities of their intention to provide crypto-asset services (Article 60(13) and (14) of MiCA).
• The authorisation of crypto-asset service providers (CASPs) (Article 62(5) and (6) of MiCA).
• Complaints handling by CASPs (Article 71(5) of MiCA).
• The identification, prevention, management and disclosure of conflicts of interest (Article 72(5) of MiCA).
• The proposed acquisition of a qualifying holding in a CASP (Article 84(4) of MiCA).

The deadline for comments was 20 September 2023. ESMA expects to publish a final report and submit the draft RTS and ITS to the European Commission for endorsement by 30 June 2024 at the latest.

FCA statement on its expectations for firms ahead of new cryptoasset financial promotions regime

On 7 September 2023, the FCA published a statement regarding its expectations on firms meeting the new cryptoasset financial promotions regime coming into force on 8 October 2023.

The FCA found that a lot of potentially in-scope firms have faced significant challenges in preparing for the new regime, and it has taken into consideration the need to prepare to the travel rule. The authority therefore noted that while the core rules still come into effect from 8 October 2023, it will consider giving cryptoasset firms more time to implement certain changes that require greater technical development. Namely, crypto firms registered with the FCA under the MLRs and firms otherwise authorised by the FCA, can apply for a modification by consent to the financial promotion rules. This allows for a delay of the implementation of the "back end" Direct Offer Financial Promotion rules until 8 January 2024.

The FCA has also released examples of good and poor practice to provide businesses with support in their compliance process.