Payments… Open Banking… Crypto… Fintech takeaways from the FCA’s Perimeter Report Q2 2022

Our previous blog post reviewed some of the key points arising out of the FCA’s quarterly perimeter report relating to consumer investments, the overseas persons exclusion and firms’ business models. 

By way of follow-up, we look at the highlights relating to the fintech sector that provide the direction of travel for a number of market segments.

Insights for the sector include:

Payments

• The FCA outlines that it regulates more than 1,600 payment services firms that hold over £24bn in safeguarded funds. Current developments in the UK payments landscape include open banking, stablecoins, central bank digital currencies and the New Payments Architecture (NPA).  In October 2021, the Government published its response to its 'Payments Landscape Review: Call for Evidence'. This set out its vision for a payments sector at the forefront of technology, ensuring consumer protection and choice, operational resilience, competition and harnessing innovation.  Recognising the changing risks in the industry as operating models evolve, the FCA highlights that it is working closely with HM Treasury to lay sustainable foundations for the next phase of growth and evolution of the UK payments market. The FCA will continue to seek to manage the risk of harm to consumers through market intervention and policy work, including by managing risks of harm caused by firm failure, improving firms' resilience and consumer protection.

Open Banking

• The FCA cites Open Banking as a great example of greater competition and innovation bringing real benefits to consumers and businesses. Open banking has over 5.5 million users to date. In March 2022, HM Treasury, the CMA, the PSR, and the FCA published a joint statement on the future of Open Banking. This explained how all authorities are working together to define a common vision for open banking and the framework for the future open banking entity as the system transitions from the current to the future framework. It also announced a new joint regulatory oversight committee (JROC) led jointly by the FCA and the PSR to deliver this.  The FCA has also authorised or registered over 130 open banking firms and supported over 50 payment firms using Open Banking technology in its Sandbox and Innovation Pathways service.  The FCA is also considering the broadening of open banking to open finance. It is working with BEIS and HM Treasury on this, considering the lessons that can be learnt from open banking, assessing the required regulatory framework, considering the open finance initiatives in other countries and working closely with industry as industry initiatives accelerate.

Cryptoassets

• Most cryptoassets and cryptoasset-related activities currently sit outside the UK’s regulatory perimeter.  HM Treasury has announced intentions to consult on wider regulation of the cryptoasset sector, following proposals to extend the scope of the Financial Promotions regime to certain types of cryptoassets. The FCA confirms that in the meantime, it will continue to monitor the market and consider whether activities fall within its perimeter. It also expects firms to have robust AML control frameworks in place to manage the increased financial crime risks from cryptoassets. The FCA had registered 34 firms (up to March 2022) with around 80% of firms assessed refused or otherwise withdrawing their application.
• In April 2022, HM Treasury published its consultation response confirming the extension of the payments perimeter to cover fiat-backed stablecoins where used as a means of payment. This will include a new regulated activity for the custody of such stablecoins. The FCA is working with HM Treasury, the Bank of England and the PSR to develop an appropriate regime, including considering whether any adaptations may be needed to FCA rules and guidance.
• The FCA has also consulted to strengthen its financial promotion rules for high risk investments, including cryptoassets (see our latest blog on the FCA’s policy statement here). It plans to work with HM Treasury on what further regulatory or legislative change is required to build a future regime for cryptoassets used as investments, and how it can best reduce risks to both consumers and markets.

Senior Managers and Certification Regime

• Payments and e-money firms are not currently subject to the SM&CR. The FCA considers that extending the regime would strengthen individual accountability and governance in firms and strengthen the FCA’s supervision.