About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses are able to access finance.

Introduction and key points

Innovate Finance welcomes the opportunity to respond to the Financial Conduct Authority’s (FCA) consultation on introducing a gateway for firms who approve financial promotions (CP22/27).

In drafting our response, we have consulted a range of our FinTech members, specifically a range of Buy Now, Pay Later (BNPL) firms and crypto asset service providers. We have also considered the impacts of the FCA’s proposals on the FinTech ecosystem and on future innovation.

We support the principle of ensuring that all financial promotions are fair, clear and not misleading – and for financial promotions to be effectively regulated with robust enforcement. This is critical to building consumer trust, ensuring consistent high standards and clamping down on irresponsible practices.

We have serious concerns, however, about the proposals for the section 21 (s. 21) regulatory gateway regime, as set out in CP22/27:

The proposed approach will further reduce an already small number of third-party approvers of financial promotions for firms outside the regulatory perimeter (including currently unregulated providers of BNPL products and services, and crypto asset service providers). The approach as set out, specifically the additional reporting requirements, is already leading third-party approvers to consider withdrawing from the market.

Innovate Finance has been able to identify fewer than five responsible, FCA-authorised firms who review and approve financial promotions for the BNPL and/or crypto sectors. All of the third-party approver firms that we have spoken with told us that the FCA’s proposals – including the £5000 application fee and reporting requirements – are too onerous and will lead third-party approvers to exit the market. Only one firm stated that it would continue its business operations, focusing on Appointed Representative (AR) work, but it would be very unlikely to apply to the FCA for a variation of permission to approve financial promotions in the future under the new s. 21 regulatory gateway regime.

The proposals in CP22/27 set out reporting requirements which were not part of HM Treasury’s (HMT) consultation on the gateway. The HMT consultation was focused on maintaining a register of approved third-party approvers. The reporting requirements are neither essential for this, nor for enforcement activity, and are totally disproportionate and unnecessary — whilst adding a very significant burden on third-party providers, and to the extent that it is likely to make their business model unviable.

We welcome the clarity from HMT that FCA registered crypto firms are able to issue their own financial promotions while the broader crypto asset regulatory regime is being introduced. We would urge the Government and the FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for anti-money laundering (AML) / counter terrorist financing (CTF) purposes, until the sector is brought within the UK’s regulatory perimeter.

The consequences of CP22/27 proposals

In the BNPL market, the most likely result of the proposals in CP22/27 would be that unregulated providers will be unable to access the services of third-party approvers. This will prevent a number of BNPL firms — which offer products and services that are not regulated by the FCA under consumer credit regulation and rely on the exemption in Article 60F(2) of the Regulated Activities Order — from providing any services in the UK.

In short, the proposals create significant barriers to entry and serve as a blocker to existing operations for a number of firms that provide BNPL products and services in the UK. The impact of the regulatory gateway, if implemented in line with current proposals, would be to materially reduce competition and innovation in the unsecured credit market and significantly reduce the number of providers in the BNPL market. This would hinder consumers from accessing BNPL products and services, which provide interest free credit and can be a useful tool for people to manage their finances when used appropriately.

As a result of this approach, there is a real risk that UK retail consumers are targeted by financial promotions from unscrupulous overseas firms. While we recognise that the UK financial promotions regime has extraterritorial reach, in practice, it will be extremely challenging for the FCA and other agencies to protect UK consumers from harmful activity.

In the case of both crypto asset providers and BNPL providers, our members have advocated and called for regulation to bring their products and services within the regulatory perimeter. In the case of BNPL, we have been waiting for over two years since the publication of the Woolard Review.

In the interim, our members are already taking proactive steps to enhance consumer protection. BNPL member firms, for example, are already working to a higher standard than what is expected of ‘traditional credit’. For example, some providers are designing and trialling consumer-friendly disclosures that are better adapted to digital channels to ensure that consumers have readily understandable information at the correct touch points in the consumer journey. Many firms leverage Open Banking data, as well as data from the main Credit Rating Agencies (CRAs), to conduct affordability checks which gives a more accurate view of the state of prospective customers’ finances. Members have also taken onboard feedback from the Advertising Standards Authority (ASA) and the FCA in relation to their advertisements. The FCA appears to have failed to recognise this maturation of the BNPL market in its consultation.

Firms should not be penalised for (a) being innovators and (b) the fact that the UK Government has been slow to consult on extending the regulatory perimeter.

This impact — i.e. effectively banning any financial services that lie outside the regulatory perimeter — will prevent any future innovative financial services coming forward in the UK. The next wave of innovation risks getting halted due to the lack of third-party approvers under the new s. 21 regulatory gateway regime.

An alternative approach and proposed solution

These consequences (whether unintended or not) could be averted if proposals were amended to:

Take a more flexible approach to ‘expertise’ required for new sectors, including future innovation.

Delay application of the s. 21 regulatory gateway regime to sectors that are awaiting proposals for extending the regulatory perimeter, noting the precedent set for some FCA registered crypto firms.

In particular, we would urge the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for AML/CTF purposes, until the sector is brought within the UK’s regulatory perimeter.

This temporary regime would need to ensure that there is a level playing field between FCA authorised and unauthorised firms that offer BNPL products and services. For example, following the FCA’s Dear CEO letters and the ASA’s advice note, regulated firms that offer BNPL products were provided clarity that the FCA is the lead supervisor for technical aspects of financial promotions, rather than the ASA. In order for there to be a level playing field, the FCA would also need to take the lead on supervision and enforcement of financial promotions by firms without FCA authorisation. There should not be a situation where firms without FCA authorisation are held to a higher standard than their authorised peers; and vice versa.

Include the ability to suspend or amend the requirements if the market for third-party approvers that services a specific sector, under the s. 21 regulatory gateway regime, falls below a minimum threshold.

Review and revise the proposals on reporting requirements to focus on a proportionate approach that seeks the minimum information required and that is focused on the specifics of enabling effective enforcement action. The current proposals represent a shopping list of data that either will not be analysed or will mainly be used for market intelligence rather than enforcement action.

Culture, capacity and capability across the FCA

The unintended consequences of the FCA’s proposals impact competition, responsible innovation that benefits UK consumers and businesses, and the international competitiveness and attractiveness of the UK as a place to start and scale a FinTech business.

The FCA’s existing and forthcoming secondary objectives (including on competitiveness) will only be successfully applied if accompanied by a culture (i.e. behaviours and incentives, at all levels of the organisations) that supports them, and culture change to achieve these; plus the right capability in terms of skills, knowledge and resources.

In particular the new objectives, and a wider understanding of innovation and the markets being regulated, need to be embraced in individual supervisory and policy teams, not just at leadership levels and in innovation teams. A comprehensive programme of culture change and capability is needed. In terms of the culture piece, it is concerning to note that the consultation paper takes an unbalanced view of technology and innovation, which we explore in more detail below. It is also not clear, based on the FCA’s proposals, that the regulator fully understands that the BNPL embedded lending business model is reliant on promotions made by the distributors of the product – i.e. merchants – with merchant fees, rather than interest or late repayment fees borne by consumers, driving the model.

The pace of change in technology and the market means it is difficult for ‘vertical’ supervisory and policy teams to keep up with change. In order for the supervisory teams to take a view on the competence and expertise of third-party providers (to assess their expertise to approve financial promotions in a specific sector), the FCA will itself have to upskill and expand the number of technical experts in emerging technologies and markets.

Lack of capacity and capability to think about FinTech innovation in established markets and to process new approvals can mean that the UK regime is less responsive and/or ill-designed for scale-up firms. We are mindful that the FCA authorisation teams have faced challenges over recent months in terms of the timeliness of processing applications from crypto firms to become registered for AML/CTF purposes. We note that FCA senior management are taking steps to address these issues.

It will be important for the relevant FCA teams to have sufficient capacity to process other crypto firms’ AML/CTF registration applications, so that if successful, they can also rely on the temporary exemption to the regulatory gateway regime as announced by the Government.

CP22/27 takes an unbalanced view of innovation and technology

We were concerned by the tone of some of the introductory sections of CP22/27, specifically chapter 2, entitled “The wider context”. We would agree with FCA that:

“As we face the rising cost of living, consumers are having to make difficult decisions about their finances and how they pay for things. Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions.”

The consultation paper implies that digital financial services are solely a cause of problems, and it fails to recognise that digital tools and services can help. Many FinTech providers are providing consumers with information and budgeting tools that enable them to better manage their finances in the face of rising cost of living.

We do not support the implication that digital services create worse outcomes when compared with non-digital offerings and distribution channels. As noted in the consultation paper:

“A majority of financial services customers (77%) prefer researching and buying products online over in-branch, and roughly the same proportion are confident they can find the best products for their needs. Similarly, a majority (71%) say they look for reviews and recommendations before arranging a new product, with digital channels allowing consumers to obtain the opinions of thousands of others.”

The aim of policy, regulation and the market should be to build on this consumer desire for research and information, and the ability of online research and services to enable this in a less pressured environment than some face-to-face or in-branch services. However, this consultation paper does not explore how online services empower consumers further and can provide a more objective space than many in-branch and face-to-face provisions.

We also note the FCA’s concern about social media influencers: “We often encounter financial promotions on websites and social media, including those communicated by social media influencers, which emphasise the benefits of financial products without giving fair and prominent indication of relevant risks. Where the person communicating such promotions is not authorised, the promotion may require approval.”

We share the FCA's concern about non-compliant financial promotions made by social influencers on social media sites. The best way of tackling these must be through digital monitoring and enforcement tools, as well as consumer complaints and action by social media firms. We note that the FCA's approach to this has already seen a 14 time increase in FCA enforcement action in 2022 compared to 2021. We fail to see how additional reporting requirements, on the basis proposed in CP22/27, would help tackle social influencers — the enforcement actions already being taken by FCA seem more appropriate.

The FCA in this consultation paper also noted that, “We also frequently see scam adverts in the high-risk investments space”. We would strongly agree that action is needed to tackle scam adverts. However, the s. 21 regulatory gateway regime is not the solution. Scams are illegal and law enforcement action is needed.

The Online Safety Bill (OSB) is intended to introduce a world leading regulatory framework to hold tech companies responsible for scams perpetrated via their platforms. The OSB’s provisions regarding user-generated and illegal content and fraudulent advertising are critically important in the context of financial promotions: it is essential that these provisions enter into force and effect as soon as possible, so that all participants in the UK’s digital economy are sufficiently incentivised to reduce scams.

Questions and responses

Do you agree with our proposed approach to assessing applications?

We are concerned that the proposed approach to assessing applications will disproportionately impact new and emerging financial services, where there may be less ‘expertise’ in third-party approvers.

CP22/27, paragraph 4.5 states: “We would normally expect applicants to apply for permission to approve financial promotions for investment types which are broadly in line with their Part 4A permissions. Where firms apply to be able to approve financial promotions of investment types that are beyond their Part 4A permissions we will scrutinise more closely the systems and controls that the firm will maintain to ensure the compliance of those promotions.”

None of the responsible, FCA-authorised third-party approver firms with whom we have spoken indicated that they would apply for a variation of permission from the FCA to approve financial promotions under the new regime.

In light of the dearth of third-party approvers, the FCA needs to conduct a more detailed assessment of the number of firms who will seek approvals via the s. 21 regulatory gateway for specific services and sectors. It is likely that these firms will not be able to find an appropriate third-party to approve their financial promotions.

We recommend that the FCA:

Take a more flexible approach to ‘expertise’ required for new sectors, including future innovation.

Delay application of the s. 21 regulatory gateway regime to sectors that are awaiting proposals for extending the regulatory perimeter, noting the precedent set for some FCA registered crypto firms.

In particular, we would urge the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for AML/CTF purposes, until the sector is brought within the UK’s regulatory perimeter.

This temporary regime would need to ensure that there is a level playing field between FCA authorised and unauthorised firms that offer BNPL products and services. For example, following the FCA’s Dear CEO letters and the ASA’s advice note, regulated firms that offer BNPL products were provided clarity that the FCA is the lead supervisor for technical aspects of financial promotions, rather than the ASA. In order for there to be a level playing field, the FCA would also need to take the lead on supervision and enforcement of financial promotions by firms without FCA authorisation. There should not be a situation where firms without FCA authorisation are held to a higher standard than their authorised peers; and vice versa.

Include the ability to suspend or amend the requirements if the market for third-party approvers, under the s. 21 regulatory gateway regime, that services a specific sector falls below a minimum threshold.

Review and revise the proposals on reporting requirements to focus on a proportionate approach that seeks the minimum information required and that is focused on the specifics of enabling effective enforcement action. There needs to be a move away from the current shopping list of data that either will not be analysed or will mainly be used for market intelligence rather than enforcement action.

Do you agree with our proposed approach to determining whether to refuse an application or to grant permission on terms which are different from those for which application has been made?

We reiterate our response to Question One, above. The requirements are too onerous and will unfairly prevent or limit availability of financial promotions approvals for existing innovative firms and future emerging services.

Do you agree with our proposal not to make changes to the Financial Ombudsman Service’s CJ for complaints about the approval of a financial promotion?

Yes.

Do you agree with our proposal for s 21 approvers to submit a notification to us within 1 week of every approval, withdrawal or amendment of a financial promotion?

No. The proposals require too much information, submitted too frequently.

The proposals suggest a fundamental lack of understanding of the nature of UK retail, which is largely e-commerce driven. Financial promotions are not always in the ‘traditional’ form of printed campaigns on billboards and table talkers. Financial promotions are now increasingly push notifications, Google advertisements, social media posts, banners, browser extensions, etc.

The information requirements need to be reviewed and discussed with industry with evidence of how they will be used: to ensure a focus on information is absolutely essential for achieving the aims of the gateway. Much of the information requirements set out in CP22/27 seems designed to provide a wider information gathering for the FCA’s assessment of the market — not to deal specifically with the issue of enforcing financial promotion rules. There are other ways of collecting this data for the purposes the FCA mentions — e.g. utilising digital market insight.

Paragraph 4.21 of CP22/27 states, “Collecting information on the unauthorised firms for which firms are approving promotions will help us to better understand the nature and activities of those promoting financial products on the edge of our perimeter.”

Understanding activities outside the regulatory perimeter is not one of the aims on which HMT proposed the gateway and goes way beyond the remit given to the FCA for introducing the gateway. This is mission creep and in turn creates unnecessary, additional and burdensome reporting and notification requirements which will in turn force many to leave the market.

The reporting and notification requirements as a whole appear to go way beyond anything envisaged in the HMT consultation on the gateway.

The HMT consultation response did not propose or consult on additional reporting requirements. Paragraph 3.19 of the HMT consultation response stated:

“This gateway will ensure that the FCA has a record of which authorised firms are approving financial promotions. This will make it easier for the FCA to proactively supervise this activity. Consumers should continue to alert the FCA if they encounter a promotion they feel is unfair, unclear or misleading. The government believes that the clear penalties for firms that breach the gateway, and the record the FCA will have of which authorised firms are approving financial promotions addresses concerns from respondents (set out in paragraph 2.6) about the effectiveness of the solution and risks to implementation.“

As mentioned, we have consulted BNPL providers and the firms which currently approve their promotions. We have been able to identify fewer than five responsible, FCA-authorised firms who review and approve financial promotions for the crypto and/or BNPL sectors.

All of the third-party approver firms that we have spoken with told us that the FCA’s proposed £5000 application fee and reporting requirements are too onerous and will lead to third-party approvers exiting the market. Only one firm stated that it would continue its business operations, focusing on AR work, but it would be very unlikely to apply to the FCA for a variation of permission to approve financial promotions in the future under the new s. 21 regulatory gateway regime.

All of the firms with whom we have spoken voiced concerns that as the pool of responsible, UK-based third-party approvers shrinks, or disappears entirely, then firms without an FCA authorisation (such as crypto and some BNPL providers) could struggle to maintain their UK operations. So, there is clearly a risk of unintended outcomes of reducing competition and innovation as well as the international attractiveness of the UK as a place to start and scale a FinTech business. Responsible FinTech firms exiting the UK market also raises issues around possible consumer detriment. Therefore, it would be helpful to understand if the FCA has fully considered the unintended consequences for these relatively nascent markets and UK consumers and the steps it will take to mitigate these risks.

We would reiterate that one proposed solution for the BNPL sector is for the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for AML/CTF purposes — in the way that they have done for the crypto sector — until the BNPL sector is brought within the UK’s regulatory perimeter.

This temporary regime would need to ensure that there is a level playing field between FCA authorised and unauthorised firms that offer BNPL products and services. For example, following the FCA’s Dear CEO letters and the ASA’s advice note, regulated firms that offer BNPL products were provided clarity that the FCA is the lead supervisor for technical aspects of financial promotions, rather than the ASA. In order for there to be a level playing field, the FCA would also need to take the lead on supervision and enforcement of financial promotions by firms without FCA authorisation. There should not be a position where firms without FCA authorisation are held to a higher standard than their authorised peers; and vice versa.

Do you agree with our proposal for s21 approvers to submit regular reports to us on financial promotions approved for unauthorised firms?

Do you agree with the proposed metrics and bi-annual report frequency?

No. See also our answer to Question 4. This data is not necessary for the aims of the proposal or as consulted by HMT.

The reporting metrics are too detailed and bi-annual returns are too frequent.

The FCA should work with industry to review and revise the proposals on notification and reporting requirements. The focus should be on a proportionate approach that seeks the minimum information required to enable effective enforcement action. The current shopping list of data will either not be analysed or will mainly be used for market intelligence rather than enforcement action.

Do you intend to apply for permission to approve financial promotions?

Please note that if the reporting requirements are introduced as proposed, very few, if any, third-party approver firms will apply for permission to approve financial promotions.

Do you agree with our proposed changes to the non-Handbook guidance for the approval of financial promotions for unauthorised firms?

Please see our responses, above. We would urge the FCA to collaborate with the Government to create a temporary regime for the BNPL sector, to enable those firms that do not yet have FCA authorisation to approve their own financial promotions until BNPL activities are brought within the UK regulatory perimeter.

[ENDS]

1 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/995565/HMT_WR_113_Consultation_Response.pdf

2 From 10 January 2021, all existing crypto asset businesses carrying on crypto asset activity in the UK must have been registered with the FCA: https://register.fca.org.uk/s/search?predefined=CA

3 `We recognise that some firms that offer BNPL products and services have FCA authorisation as these firms also offer regulated credit products. These FCA authorised firms will be able to approve their own financial promotions without the need to rely on the services of a third-party approver firm.

4 The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001

5 Buy Now Pay Later (BNPL) is interest free credit that gives consumers the ability to pay for goods and services in a fair and transparent way over structured repayment periods which tend to be a shorter duration (e.g. usually from around 30 days to 6 months) compared to the majority of other credit products and provide a scheduled repayment plan. They give consumers the flexibility to spread or delay payments, which can be a useful tool for people to manage their finances when used appropriately. Credit is linked to a consumer’s specific purchase, with each transaction individually assessed (in contrast to traditional credit cards which conduct a one-off eligibility assessment at the time a consumer signs up from which a line of credit, often in the thousands, is then extended). By using BNPL instead of interest bearing credit cards, consumers are estimated to have saved £103 million in interest charges in 2021, according to estimates from Bain & Company (Buy Now, Pay Later in the UK).

5 https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf

6 https://www.asa.org.uk/advice-online/consumer-credit.html

7 https://www.fca.org.uk/news/press-releases/financial-watchdog-blocks-thousands-misleading-ads

8 https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf

9 https://www.asa.org.uk/advice-online/consumer-credit.html

10 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/995565/HMT_WR_113_Consultation_Response.pdf

11 https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf

12 https://www.asa.org.uk/advice-online/consumer-credit.html