Fintech and crypto regulation to look out for in 2023
The UK's approach to fintech and crypto regulation has been to strike a balance between supporting innovation and ensuring a secure financial system. But a seemingly never-ending series of fronts have opened up. What comes next?
There is no doubt in 2023 the fintech industry is looking for regulatory clarity after a year of rapid change in the past twelve months.
After a decade of ever-expanding largess, fintech faced the prospect of a life with falling venture capital backing as an era of “cheap” money came to an end.
This prompted many fintech companies to bring forward a path to profitability and coincided with a slew of new regulatory fronts particularly here in the UK from crypto, BNPL and open banking.
Yes, fintech adoption continues to revolutionise the way we handle money, but the government has needed to be more and more focused on trying to keep up with the pace of change. Repeated changes in government have not helped. Can the UK catch up in 2023?
A balancing act
Financial regulation in the UK has for a number of years been aimed at ensuring consumer protection, promoting innovation, and maintaining stability in the financial sector.
The regulatory framework is overseen by the Financial Conduct Authority (FCA), which established its Sandbox program to support fintech startups and encourage experimentation in a controlled environment nearly a decade ago.
The FCA has also issued specific guidelines for various fintech products and services, including peer-to-peer lending, crowdfunding, and payment services that have been important drivers of change, most notably the former which began a spiral of change from 2019 onwards with platforms moving away by and large from retail funding.
The UK government has also implemented anti-money laundering and counter-terrorism financing regulations for cryptocurrency exchanges operating in the country more recently.
Additionally, the Bank of England’s favourite focus is establishing a regulatory framework for digital central bank currencies and monitoring the development of stablecoins.
With new technologies and financial products popping up every day, it can be challenging to keep up with the latest changes. But, fear not! In this article, we'll delve into the complex world of regulation and examine how the UK is balancing innovation with protection for consumers and stability in the financial sector.
The “Edinburgh Reforms”
The UK government is set to enact a major overhaul of the whole of the existing banking regulations in the country.
Dubbed the "Edinburgh Reforms" and announced by Chancellor Jeremy Hunt in De December, these new regulations will "turbocharge growth" for the country.
He describes the package as the biggest overhaul of banking rules in 30 years. The reforms build on the government's reform agenda, which is being taken forward through the Financial Services and Markets (FSM) Bill.
The reforms are aimed at building on the strength of the UK's financial services sector, taking advantage - Hunt argues - of the opportunities provided by the country's exit from the European Union to tailor regulations to suit the country's needs.
The government has set out a collection of 30 regulatory reforms for financial services and a number of EU regulations are being reviewed, repealed and replaced.
One of the key changes being proposed is to the ringfencing rules, which currently require major banks to separate their retail and investment arms, even if they don't have an investment arm.
The government is looking to cut red tape and boost banking competition by freeing retail-focused banks from these rules, while still maintaining protections for consumers. This could reshape the competitive landscape substantially, particularly for neobanks.
“The Edinburgh reforms laid out the Chancellor's strategy for the near future and it's a packed agenda. It will be crucial that aspirational but complex projects like reforming the Consumer Credit Act and the Payment Services Regulations, both of which are under review as we speak, do not distract from a bouquet of loose ends,” Charlie Mercer, head of economic policy at Coadec said.
“While clarity on what's next on open banking and crypto is much needed, we're also long overdue for an update on BNPL, which remains unregulated two years on from the Woolard Review. It's right to be ambitious, but the reality is that fintechs won't be able to properly engage with long term change while short term uncertainty persists" Mercer added.
While new laws on lending, particularly in the fast moving world of ‘buy now, pay later’ may not arrive this year, reform of the Consumer Credit Act via a consultation is likely to bring the biggest shake up in consumer credit for several generations, according to Myron Jobson, senior personal finance analyst at Interactive Investor.
In turns out the 1974 law didn’t have much in the way of mentions around BNPL.
Just before Christmas 2022, the government published a consultation on how the modernisation of consumer credit legislation should go.
“Attitudes to credit have change since the Act was introduced half a century ago. The growth in digital lending is happening due to changes in consumer behaviour. Safeguards will likely be updated to account for this trend,” Jobson said.
"It is also important that language around credit is made clearer. The reason many borrowers get into difficulty is because they don’t fully understand the consequences of what they’re taking on,” Jobson added.
Buy now pay later schemes are a case in point, he says.
“Adverts promoting BNPL schemes can be as clear as mud, and the worry is an increasing number of people are using such schemes without having a clear understanding of the key considerations, a slippery slope into serious debt.”
“The need for an up-to-date and robust set of rules governing the credit market has never been more important amid the cost-of-living crunch.”
While still much smaller than the mainstream financial system, crypto is high on the agenda for the UK government owing to the breakneck speed of its growth in recent years coupled with the seemingly never-ending series of scandals and fraud coming out of the sector.
Crypto exchange Luno’s global head of public policy Thomas Tudehope wrote in an article for AltFi in November that a “ seriously significant step” in terms of cryptocurrency regulation has already taken shape as an amendment via an amendment tabled by Andrew Griffith MP and HM Treasury to the Financial Services and Markets Bill.
It will likely prompt the UK to introduce a full “comprehensive regulatory regime” for crypto in 2023, Tudehope says.