The Financial Services and Markets Bill: what’s in it for UK FinTech?
by Adam Jackson, Director of Policy, Innovate Finance
The UK Government has recently introduced a Financial Services and Markets Bill in Parliament, a draft law that creates a new, post-Brexit regulatory framework for UK financial services. As well as transferring new powers to the UK regulators, which were previously exercised by EU institutions, the UK Government is taking the opportunity to update the regulatory system and future proof it for new technology, products and services. The Bill is a whopper - 335 page long. You can read it all here. We have boiled it down to ten key takeaways for FinTech:
- Stablecoin regulation is on the way
The Bill gives regulators the powers to regulate stablecoins. This is an ‘enabling power’, bringing stablecoins into the remit of the Financial Conduct Authority (FCA), Bank of England and Payment Systems Regulator (PSR). This creates a new legal definition of “digital settlement asset”, which is expressly focused on stablecoins (and associated services) used for payments. It does not cover wider cryptoassets, including those primarily used as a means of investment – the Government will consult on its regulatory approach to these separately later in 2022.
The Bill will
- enable the FCA to establish an authorisation and supervision regime, drawing broadly on existing electronic money and payments regulation, to mitigate conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins.
- enable HM Treasury to designate ‘systemic’ stablecoin providers and operators and for the Bank of England to regulate these to mitigate financial stability risk. This designation of ‘systemic’ is restricted to cases where any deficiencies in the services provided by the service provider, or any disruption to the provision of those services, would be likely— (a) to threaten the stability of, or confidence in, the UK financial system, or (b) to have serious consequences for business or other interests throughout the United Kingdom.
- Enable the PSR to regulate payment systems using stablecoins (digital settlement assets), to address issues relating to competition, innovation, user interests and access.
- Enable HM Treasury to apply the Financial Markets Infrastructure Special Administration Regime (FMI SAR) - a bespoke administration regime to mitigate the risks to financial stability associated with a systemic stablecoin firm’s failure.
- Allow HM Treasury to amend or disapply existing FCA or PRA rules in areas relating to financial stability to avoid relevant systemic stablecoin firms being subject to conflicting requirements.
The definition of digital settlement asset service providers, subject to these rules, includes coin issuers, exchanges, custody and wallet providers and system infrastructure providers.
Note that the Bill gives the regulators power to regulate stablecoin; the regulators will then need to develop specific detailed regulatory proposals and consult on these.
- The UK is looking to lead in Distributed Ledger Technology (DLT) enabled Financial markets Infrastructure
The Bill enables HM Treasury to set up one or more Financial Market Infrastructure (FMI) sandboxes, which will enable participating firms to test and adopt new technologies and practices. An FMI sandbox will do this by enabling participating firms to be subject to temporary modifications to legislation, where that legislation does not currently accommodate such activities or is ambiguous as to whether or not it can be accommodated. HM Treasury will also be able to make permanent changes to legislation via secondary legislation, on the basis of what is learned in each FMI sandbox. HM Treasury will be able to temporarily disapply or modify relevant legislation relating to the regulation of FMIs and to allow FMI entities to innovate, within the scope of the activities they have been authorised to carry out, in an FMI sandbox. This is a radical reform to support innovation and allows for a very flexible ‘beta testing’ approach to regulation for participating entities. They particularly have in mind DLT-enabled and digital asset-enabled market infrastructure.
Taken together with the stablecoin provisions, this is incredibly important for enabling the UK to remain at the forefront of the next wave of digital innovation around payments and financial market infrastructure.
- The FCA and PRA will in future have to take account of the impact of their actions on UK competitiveness
The Bill introduces a new ‘secondary’ objective for these regulators to have regard to the competitiveness of the UK and economic growth and will have to report annually on how they are applying this. This is most welcome and should increase focus on innovation. It will still need to be supported by culture, capacity and capability in the FCA and PRA. There are good indications that this is underway. The Government’s ‘State of the Sector’ report on the competitiveness of UK financial services (which you can read here) , published alongside the Bill, noted that the FCA and PRA are “embedding innovation experts in regulatory and supervisory teams, for teams focussed on companies at different stages of growth, and throughout policymaking teams, so that every part of the regulators is more pro-innovation”. But we would still like to see this hardwired into the legislation, for example requiring regulatory performance metrics and annual benchmarking.
The competitiveness objective only applies to the FCA and PRA, despite calls (including by Innovate Finance) to extend it to other regulators and quasi-regulatory entities including the PSR and Financial Ombudsman Service (FOS). However…
- Other regulators will see some changes
Crucially, the Bill will legislate for improved cooperation between the FCA, FOS and the Financial Services Compensation Scheme (FSCS). The Bill will make it a statutory requirement for the FCA, FOS and FSCS to cooperate on issues with wider implications. In addition, the Bill requires the FCA, the FOS and the FSCS to publish a statement of policy setting out how they will comply with this duty to cooperate on “wider implications” issues. It also requires them to put in place arrangements for stakeholders to provide representations on their compliance with the duty, and requires the publication of an annual report on compliance with the duty including any representations received from stakeholders. This is something we have called for at Innovate Finance, to ensure greater consistency, and this will become all the more important when the FCA’s new Consumer Duty is introduced later this year.
The Bill also gives HM Treasury powers to issue recommendations to the PSR on aspects of economic policy to which the regulator should have regard, including in relation to payment card interchange fees.
- Regulators will be legally required to support the Net Zero targets
The Bill introduces a new regulatory principle requiring regulators to contribute towards achieving a Net Zero emissions target. This applies to the PSR as well as the FCA, PRA and Bank. This underlines the fact that we will continue to see further regulation of financial services and capital markets to align with Net Zero – where FinTechs have a powerful role to play in providing digital and data-driven solutions that can help enable and accelerate this transformation (see our response to the Government’s Green Finance strategy consultation here).
- New powers for PSR to mandate reimbursement of Authorised Push Payment (APP) scams
The Bill gives the PSR powers to mandate payment service providers to provide reimbursement to victims of APP scams. The Bill also places a duty on the PSR to take regulatory action on APP scam reimbursement by participants in the Faster Payments Service, by requiring the regulator to consult on a draft regulatory requirement, and impose a regulatory requirement, within two and six months respectively of the legislation coming into force. Innovate Finance has raised the concerns of our members about this approach, which does little to account for efforts made by each provider to prevent fraud nor take account of the origin of frauds, which tend to occur on social media and telecomms platforms. Our views were set out in our response to the PSR consultation on this which you can read here. The now delayed Online Safety Bill would go some way to addressing online adverts that cause such scams, but we still lack a joined-up, outcome focused approach to the scourge of online payment scams; one which rewards those who take action; educates consumers; and takes stronger action on the causes and enablers and not just remedying the symptoms of this crime.
- Regulation of technology outsourcing providers
Regulated financial services firms and financial market infrastructures are increasingly outsourcing important services, such as cloud services, to third parties who are not regulated by the Bank of England, PRA or FCA. outside the financial services regulatory perimeter. The Bill will enable HM Treasury to designate certain third parties as ‘critical’ and give the Bank, PRA and FCA the ability to directly oversee critical services provided to regulated firms and financial market infrastructures by designated critical third parties. This will allow the regulators to intervene to raise the resilience of these services and reduce the risk of systemic disruption in the finance sector. The Bill will give the Bank, the PRA and the FCA powers to make rules, gather information, and take limited enforcement actions in respect of the services that critical third parties provide to regulated finance firms and financial market infrastructures. The Bank, the PRA and the FCA have published a Discussion Paper setting out how they will exercise these new oversight powers in practice, and how they would make recommendations to HM Treasury on potential critical third parties. This is clearly important for ensuring resilience across financial services, recognising that technology now underpins all services. It will be important to ensure that these rules are applied proportionately and that those in scope are truly ‘systemic’.
- New financial promotions Gateway
The Bill establishes a regulatory ”gateway”, which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. Any authorised firm wishing to approve the financial promotions of unauthorised firms will first need to obtain the permission of the FCA. The FCA will also be able to place limitations on the types of promotions firms will be able to approve, for example, restricting firms to approving financial promotions in their field of expertise. This will be relevant not only to firms already within the financial promotions rules but also to crypto services providers who will shortly come in scope and peer-to-peer platforms who may see further (in our view disproportionate) tightening of the rules – see the Innovate Finance consultation response on the FCA’ s proposals for extending the financial promotion rules here. It will be essential to ensure that there is adequate competition and ‘neutral’ providers of approvals who qualify for the gateway.
- Scope to open up more cross-border FinTech
The Bill provides for ‘mutual recognition’ agreements, enabling overseas regulatory systems to be recognised by the UK (and vice versa). This could provide the basis for some ground-breaking trade agreements with countries like Israel and Japan, providing for financial services ‘passporting’ between these markets and facilitating easier cross-border services.
- There remain some missing pieces
At Innovate Finance we have identified three guiding principles for building a regulatory system that continues to foster innovation and protect consumers, building a forward-looking system that provides confidence for innovators, investors and consumers. You can see them here. Within these three principles we have set out nine priority actions for regulators and government to take. The Financial Services and Markets Bill (together with the new Data Protection and Digital Information Bill) covers a significant number; there is work in train on others (such as a Central Bank Digital Currency and reform of the Consumer Credit Act); but gaps remain including more concrete action to reduce capital requirements on smaller banks, embedding RegTech and introducing a start-up and scale-up test as part of regulators’ cost benefit analysis.
This Bill will now be scrutinised by a committee of MPs in the House of Commons over the autumn, before facing further scrutiny in the House of Lords. It should be finalised and adopted in 2023. The financial promotions rules come into immediate effect at Royal Assent (when the bill becomes an Act in law); stablecoin and APP scam reimbursement provisions come into effect 2 months after Royal Assent; and other implementation dates will be set as appropriate by Ministers.
At Innovate Finance we will be engaging with policy makers and regulators on these issues to shape the development of these proposals and provide insight for our members. If you are an Innovate Finance member and have ideas or views to share or any questions, please do not hesitate to get in touch at firstname.lastname@example.org.
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