The UK Financial Conduct Authority (FCA) has issued a statement expressing concern that payment institutions and e-money institutions may have used currency converter tools in relation to their currency transfer services in a misleading way. Tools which convert currency at the interbank rate may be used in such a way as to give consumers the misleading impression that the interbank rates shown are available to them, rather than the materially inferior rate that customers are likely to achieve. Consumers may not become fully aware of the inferior rate they are likely to achieve until an advanced stage in the customer journey, commonly after a customer registration process has been undertaken. At that stage, consumers may be unlikely to shop around.
The UK Financial Conduct Authority (FCA) has provided an update on its regulatory sandbox and unveiled the list of firms that were successful in their applications to begin testing in the second cohort of the sandbox. The regulatory sandbox allows businesses to test innovative products, services, business models and delivery mechanisms in a live environment. It is part of Project Innovate, an initiative begun in 2014 to coordinate the FCA’s approach to FinTech.
The UK Financial Conduct Authority (FCA) asked Innovate Finance to chair a consultation on an ‘industry-led sandbox’. Innovate Finance is an independent not-for-profit membership association representing the UK’s global FinTech community. A report on their consultation on this industry sandbox has been published.
For the purposes of the consultation, an ‘industry sandbox’ was defined as ‘a shared off-market development environment where developers of FinTech solutions can access data, technologies, and services from different providers in order to validate innovative ideas or address common industry challenges‘. This sandbox would be set up and run by the industry to enable technology business to test their solutions (either virtually or live with limited participants) before they reach the market. It would also allow businesses and regulators to collaborate on developing the UK FinTech industry.
The UK Financial Conduct Authority (FCA) recently issued its Business Plan 2017/18 that deals with its FinTech and RegTech priorities for the year ahead. The FCA wants to engage more with regional and Scottish FinTech hubs. In its risk outlook, the FCA talks about more complex value chains that utilise FinTech posing a risk to consumer protection and market integrity. The issues associated with the oversight and controls of increasingly complex chains of third party relationships are reflected in the FCA’s priorities. The technological resilience of incumbent firms will also continue to be an area of focus because of the risk of disruption to financial markets. The FCA states that FinTech firms may not fully understand the scope of regulation and its impact on their business model. This could lead to cases of non-compliance with FCA rules, which could pose risks to consumer protection and market integrity. In addition, the FCA fears that greater reliance on technology poses increased operational risk, and risks to market integrity. The FCA believes that FinTech business models shift risk from financial firms to consumers without consumers fully understanding the implications or having adequate safeguards.
By Jacob Ghanty
The FCA has published a discussion paper (DP) on the potential uses of distributed ledger technology (DLT) in financial services. The purpose of the DP is to start a dialogue on the risks and opportunities in relation to DLT. The FCA has gained exposure to DLT through its Regulatory Sandbox initiative.
The FCA describes DLT as “a set of technological solutions that enables a single, sequenced, standardised and cryptographically-secured record of activity to be safely distributed to, and acted upon by, a network of varied participants.” It states that industry efforts to investigate DLT have become especially concentrated over the past 24 months and, in the second half of 2017 into 2018, it expects to see firms moving on from “Proof of Concept” to “real-world” deployment of this kind of technology.
The UK Treasury has recently published its Regulatory Innovation Plan in relation to FinTech. The plan overviews the current work and future projects of the four UK financial services regulators: Financial Conduct Authority (FCA), Payment Systems Regulator (PSR), Prudential Regulation Authority (PRA) and the wider Bank of England (BoE). It examines how the regulators are adapting to and encouraging disruptive business models and also utilising new technologies to reduce regulatory burdens on business. Highlights include:
The Chairman of the UK Financial Conduct Authority (FCA), John Griffiths-Jones, has delivered a speech in which he talked about conduct rules in the FinTech era. At the Cambridge Judge Business School on 13 February 2017, he talked about current regulatory models being too detailed to keep pace with the emergence of new financial technologies, leaving regulators struggling to cope with the way financial services are delivered.
He said “Rules that were designed for the paperwork era do not work necessarily for the online one. The distinction between advice and guidance, once reasonably clear, has become much greyer with the advent of platforms and the potential of robo-advice. High frequency trading is a million miles from open outcry trading on an exchange. Artificial Intelligence puts the pooling of risk via insurance under pressure as individual odds become increasingly forecastable. An additional challenge comes from the differential pace of take up of new ways of doing things by the general public…”.
The UK’s Financial Conduct Authority (FCA) has given an update on the post-implementation review of the UK loan-based and investment-based crowdfunding market since current rules came into force in April 2014. The FCA says it believes it is appropriate to modify a number of rules for the market.
For both loan-based and investment-based crowdfunding platforms the FCA has found that, for example:
- it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings;
- it is difficult for investors to assess the risks and returns of investing on a platform;
- financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’; and
- the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.
In the loan-based crowdfunding market in particular, the FCA is concerned that, for example:
- certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;
- the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity; and
- the FCA has challenged some firms to improve their client money handling standards.
The FCA plans to consult on more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms. For loan-based crowdfunding the FCA also intends to consult on:
- strengthening rules on wind-down plans;
- additional requirements or restrictions on cross-platform investment; and
- extending mortgage-lending standards to loan-based platforms.
The FCA’s ongoing research and investigatory work should be completed early in 2017. At that stage, the FCA will determine whether further consultation on rule changes is needed.
For the full feedback statement, please click here.
FinTech companies and other innovative financial businesses will be given help to establish overseas operations in the UK and Hong Kong by regulators in those countries under a new cooperation agreement signed in London on 9 December 2016. Under the agreement, the UK’s Financial Conduct Authority (FCA) and the Hong Kong Monetary Authority (HKMA) will “refer to each other innovator businesses that would like to operate in the other authority’s jurisdiction”.
Upon a referral being received, the FCA or HKMA both intend to “assist the innovator businesses in understanding the regulatory regime” that they oversee and explain “how such regimes may be relevant” to those companies. The agreement also confirms that the FCA and HKMA intend to “share information about innovations in financial services in their respective markets”, such as on emerging trends and regulatory issues pertaining to innovation. The FCA and HKMA may also pursue “joint innovation projects on the application of novel financial technologies”, share expertise and knowledge, and facilitate staff secondments to one another, under the new cooperation agreement.
By Jacob Ghanty
On 1 November 2016, the FCA published an “Occasional Paper” concerning access to financial services in the UK. In it the FCA highlights that potentially millions of UK consumers cannot use the services that would help them meet their financial needs and get involved more widely in financial markets and the economy. The FCA argues that access problems do not affect just the vulnerable (as has been identified in the past)- it also affects consumers across the spectrum. Examples of access issues include: inconsistent information and long delays in setting up bank accounts; inability to find travel insurance for people with identified health issues; and being declined for a mortgage because of difficulty proving the source of an inheritance.
The FCA highlighted numerous possible causes of problems with access, including financial institutions having inflexible process requirements for customers who have slightly unusual needs, use of jargon creating a barrier to consumer engagement with products or services and issues for consumers with poor digital literacy or limited internet access having increasingly limited choice. Rather than providing solutions, the FCA aims to begin a new conversation about financial services access issues. The FCA does not put a precise figure on the number of people affected in the UK by access issues, but given the broad range and type of issues identified, the number of individuals potentially affected by access issues may run to many millions. The issues laid out by the FCA serve as a useful basis for some firms to identify where access issues may exist in their own businesses and could be useful starting point towards addressing those issues