Twelve financial regulators and related organisations, including the UK Financial Conduct Authority (FCA), announced on 7 August the creation of the Global Financial Innovation Network (GFIN), building on the FCA’s proposal earlier this year to create a ‘global sandbox’. A list of GFIN members is here. The network will seek to provide a more efficient way for innovative FinTech firms to interact with regulators. It will also create a new framework for co-operation between financial services regulators on innovation related topics.
The UK Financial Conduct Authority (FCA) has issued its recommendations for changes to P2P lending regulations for loan-based crowdfunding platforms. Based on the FCA’s findings it invites responses to rule changes for loan-based firms which cover proposals to:
- ensure investors receive clear and accurate information about a potential investment and understand the risks involved;
- ensure investors are adequately remunerated for the risk they are taking;
- provide transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors; and
- promote good governance and orderly business practices.
By Judith E. Rinearson and Rizwan Qayyum
On June 11 2018, the Financial Conduct Authority (the “FCA”) issued a “Dear CEO” letter, which provided guidance for banks on how to handle the growing risks associated with “cryptoassets”.
The FCA defines “cryptoassets,” using Bitcoin and Ether as an example, as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.” While acknowledging that there are “many non-criminal motives” for using cryptoassets, the letter asserts that these products can be abused because they offer “potential anonymity and the ability to move money between countries.”
In a speech to Innovate Finance 2018 on 19 March, Christopher Woolard, Executive Director of Strategy and Competition at the UK Financial Conduct Authority (FCA) talked about the demand from FinTech firms to operate internationally and the FCA working with partners from around the world to consider options for a global sandbox. He said that the potential of such a project is huge – from solving global problems like money laundering to reducing the regulatory burden of compliance. Currently there is no joint sandbox programme with other regulators for firms to participate in. Such a project represents new territory.
Rob Gruppetta, Head of the Financial Crime Department at the UK Financial Conduct Authority (FCA), recently gave a speech at the FinTech Innovation in Anti-Money Laundering (AML) and Digital ID regional event, London about “Using artificial intelligence to keep criminal funds out of the financial system”. He considered whether machine learning and artificial intelligence (AI) techniques could help. Better transaction monitoring is not the only way AI can aid the fight against money laundering. The Financial Stability Board (FSB) published a report on 1 November about the impact of AI that identified other ways it can help. Examples include AI-driven anti-impersonation checks that evaluate whether photos in different identity documents match, and using machine learning to identify customers that may pose a higher risk and so warrant, say, a deeper probe into the sources of their wealth.
Andrew Bailey, the Chief Executive of the UK Financial Conduct Authority (FCA), recently gave an interview to the BBC in connection with bitcoin. In remarks on 14 December, Mr Bailey said that he currently sees no systemic risk in bitcoin and is not pushing the UK government to make the cryptocurrency part of the FCA’s regulatory remit. He emphasised that investors should be prepared to lose everything if they buy bitcoin, however as long as people understood the risks of what he termed “a very volatile commodity”, he would not press the UK government to legislate that the FCA regulate it. He said “I don’t think bitcoin is prevalent enough at the moment to be a systemic threat in the way we experienced during the financial crisis other threats; it needs watching carefully but I don’t think we’re there yet… If I thought there was evidence of people saying: ‘You know what I’m going to put my pension into? bitcoin!’ I’d be very concerned, but we don’t see that at the moment.”.
On 5 December, the UK Financial Conduct Authority (FCA) announced the firms that were successful in their applications to begin testing in the third cohort of the FCA’s regulatory sandbox. The sandbox allows firms to test innovative products, services or business models in a live market environment. The sandbox was a first for regulators worldwide. Since it opened, the sandbox has supported almost 70 firms in testing innovative products and services. The FCA is seeing more applicants from outside London and a broader range of firms. The FCA has also opened the application window for its fourth sandbox cohort.
The UK Financial Conduct Authority (FCA) has launched a new consultation entitled Our Future Approach to Consumers. In the accompanying paper, the FCA recognises that FinTech is bringing new firms into the market and developing far more efficient ways for consumers to save, borrow and invest. The FCA must strike a balance between promoting better outcomes for consumers while not compromising on consumer protection or the standards expected from firms. The FCA also need to set frameworks that ensure markets work well. An example is the New Bank Start-up Unit, run jointly by the Prudential Regulation Authority (PRA) and the FCA. This Unit provides new banks with the information and materials they need to navigate the process of becoming a bank, and tailored supervisory resource during the early years post-authorisation. Since its launch in January 2016, the Unit has helped ten applicants gain authorisation with a range of products, from mobile-only and technology-driven to a new clearing bank, and many new banks have been authorised.
On 27 September 2017, Fintech Melbourne in partnership with the UK’s Department for International Trade hosted an event on FinTech regulation with the UK Financial Conduct Authority’s (FCA) Director of Policy David Geale.
Interesting points from the night included:
- The FCA has been, and continues to be, actively involved in engaging in dialogue with industry participants, both large firms and smaller start-ups.
- As with other global regulators, the FCA is currently focused on blockchain, its potential effect on the market and the FCA’s role. The FCA released a discussion paper on distributed ledger technology earlier this year
- The FCA recently issued an initial coin offering consumer alert.
- The number of firms applying for the FCA’s regulatory sandbox exceeded initial expectations.
- Some of the more interesting concepts that David has seen come through the sandbox put existing technology to a different use such as alternative credit scoring methods (eg using social media) and connected insurance (eg using fitbit data to determine insurance premiums).
- Some UK firms have been experimenting with using videos to convey regulatory disclosures.
- Digital identity and open banking are areas of interest going forward.
The UK Financial Conduct Authority (FCA) published a report on 2 August entitled “’New Technologies and Anti-Money Laundering Compliance”. The report details findings of three months of research by the authors PA Consulting. The work included over 40 interviews with regulated firms, technology providers, and other bodies. The report sets out respondents’ views on topics such as:
- What are the key functions of new and emerging technologies related to anti-money laundering (AML) compliance, and how can they aid compliance activities?
- What challenges do firms face in introducing new technologies?
- What good practice examples and lessons are available for firms considering new compliance technologies?
- What steps could the FCA take to encourage more innovation in AML compliance?