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2021 (2)

Bronze Level Contributor

Image source: Étienne Godiard/Unsplash

A look at what we might see from regulators in the UK over the next 12 months. 

Despite a bumpy first few weeks of 2021, 2020 is behind us and, while it’s important to prophesize what the new year could hold, it’s also imperative to look back and reflect on the year that’s just ended—hindsight is 2020 after all.

One of the barriers a lot of fintechs face, either those just trying to get off the ground or much bigger, rapidly expanding, is regulation and staying on the right side of the regulators—granted, that’s why the FCA developed regulatory sandboxes to help smaller fintechs get off the ground.

But, what barriers do fintechs still face? And what regulation are we likely to see being rolled out over the next 12 months? 

In this article, we take a look. We’ve focused on the UK for now.

BNPL Regulation

The unprecedented rise of buy-now-pay-later (BNPL) has left many calling for tighter rules for the rapidly expanding sector.

At the beginning of December, Capital One became the first major US bank to block BNPL credit card transactions, describing such transactions as “risky for customers and the banks that serve them.”

In December 2020, the Advertising Standards Agency (ASA) branded four Klarna ads as ‘irresponsible’ after several influencers posted ads for the fintech linking spending (and borrowing) money with happiness.

The sector came under fire once more as MPs gained traction for a cross-party campaign urging the Financial Conduct Authority (FCA) to regulate BNPL firms, like Klarna, a bill that has since been rejected by Parliament.

Alex Marsh, head of Klarna UK, published a blog post just last week cementing Klarna’s position on tighter regulation here in the UK.

Marsh wrote: “We believe that proportionate regulation and consumer protections should be updated for the digital age rather than relying on rules conceived nearly 50 years ago.”

“This is why we believe it is right that the FCA should review how the sector is regulated—not only to support consumers now but also to protect them in the future as the sector continues to innovate.”

Other players in the BNPL space are also looking to tighten regulation here in the UK.

New Zealand firm Laybuy published a BNPL code of practice, which includes standards of advertising, assessing and supporting vulnerable customers, providing hardship assistance, and handling complaints, and is calling on other BNPL fintechs to sign it.

Despite the parliamentary setback, there is still a huge amount of scope (and desire) to regulate the BNPL sector.

Jonathon Segal, head of fintech and alternative finance at Fox Williams, told AltFi: “We think there is regulation coming down the line for buy-now-pay-later.”

“You can currently operate in the sector completely unregulated and Klarna, and other fintechs, have identified this and have said that actually, we want to be regulated. It can’t continue to be so unregulated, so we are expecting some form of regulation in this area.”

Hopefully, 2021 will be the year that regulators here in the UK will pounce on the opportunity to tighten rules for credit products given their surge in popularity as a result of the Covid-19 pandemic and also given the fact that key players in the sector are also calling out for it too.

Passporting

Some of the biggest fintechs in the UK had been utilising the EU Passporting channels to continue to operate in Europe, with Revolut being one of the most notable to have used the scheme.

In light of Brexit, fintechs were able to shift regulatory responsibility to European countries—with Ireland and Lithuania being some of the most popular destinations—to still be able to trade freely within Europe.

However, as of 31 December 2020, with the UK officially leaving the European Union, the ability to use passporting as a means of operating here in the UK was ended.

When Brexit was first brought to the table, the FCA said that firms using passporting to operate here in the UK could do so until they received the proper FCA authorisation, but given the number of high-profile fintechs using the scheme, is it likely to have a comeback?

With some of the finer details of the Brexit deal (believe it or not) still being fine-tuned, and the UK fintech sector being one of the strongest, not just in Europe but in the world, what’s stopping it?

In fact, Segal told AltFi that he thinks there could be something around the corner: “With the equivalence decision coming in the next six months, it won’t benefit all sectors but there will be pockets of activity that I think will be able to continue.”

Banking licences

Banking licences are bemoaned by fintechs as one of the hardest things to secure, for obvious reasons understandably.

Here in the UK, we have just two different iterations of banking licences, the full bank licence that the likes of Monzo and Starling hold, and then the E-Money Institution licence that fintechs like Revolut (although it has now also applied for a full banking licence) and TransferWise hold.

For instance, in Brazil fintechs can apply for a special version of a banking licence that offers them the same flexibility as a full banking licence, including the ability to offer credit products, something that German digital bank N26 has just secured

Similarly, Australia offers a restricted banking licence, that fintechs like TransferWise have been awarded, making firms limited “authorised deposit-taking institution” and enables it to gain access to Australia’s faster payments network.

Now that the UK has left the UK there’s even more reason for the FCA to cast its net wider and capture fintechs that might be put off by the more attractive environment offered by the EU, but then again, the UK is still the most prominent fintech destination in the continent. 

Segal told AltFI: “The interesting thing is we're seeing lots of banking-as-a-service fintechs in the UK. They basically take all the pain out of being a bank. It’s painful being a bank and so they pass on that cost to their customers who continue to be nimble fintechs and not weighed down with all that regulation.”

Open Banking

Just last week we marked the third anniversary of open banking as we know it, the Payment Services Directive II (PSD2), but as open banking adoption grows- now hitting 2.5m users across the UK- regulation will likely grow with it.

Already in 2021, we’ve seen the massive $5.3bn Visa/Plaid deal fall apart after pushback from the Department of Justice in the US, which served the two firms with a lawsuit in November 2020 citing Visa’s potential monopoly in the sector.

The growing popularity of open banking, particularly in sectors such as payments, could signal the need for tighter regulation in order to protect the interests of the consumer largely due to the fact that one of the greatest barriers to the adoption of open banking is a lack of trust. 

Charlotte Crosswell, CEO of fintech industry body Innovate Finance, told AltFI:  “Regulators are going to want to protect the person on the street who perhaps isn't as aware or financially savvy on some of the risks involved of some of these products.”

“What we want to ensure is we don't pile on so much regulation that it means that we're stifling innovation and that's the balance we've got to find. It’s been done in other segments of financial services in the past, you just have to have the right balance is found to have the consumer protection there.”

Moreover, PSD2, the very piece of regulation that brought open banking to life, is a European Union directive and as the UK has now officially left the EU, what’s to say that the UK won’t introduce its own iteration of the regulation.

Maybe without the fragmented EU regulations, the UK can take a step closer to open finance? Back in 2019, the FCA issued a Call for Input to explore the opportunities and risks arising from open finance, and with the deadline for input long gone, perhaps new open banking regulation is just around the corner?

Originally published by
Aisling Finn | January 25, 2021
AltFi

Read more…
Bronze Level Contributor

Image: EPA

There will be "bumpy moments" for UK businesses and travellers as they get to grips with new EU rules, says government minister Michael Gove.

He said there would be "practical and procedural changes" when the Brexit transition period ends on 31 December.

Mr Gove also urged people going to the EU to make extra checks, including mobile phone roaming charges.

EU ambassadors have approved the post-Brexit trade deal, paving the way for it to take effect on 1 January.

Under EU rules it can take effect provisionally, though the European Parliament will vote on it in January.

In the UK, MPs will vote on the deal on Wednesday.

Meanwhile, UK International Trade Secretary Liz Truss said she expects to sign a continuity trade agreement with Turkey this week - a move that was not possible until the deal with the EU was struck.

Mr Gove told BBC Breakfast: "I'm sure there will be bumpy moments but we are there in order to try to do everything we can to smooth the path."

He warned businesses that time was "very short" to make the final preparations before the transition period ends.

"The nature of our new relationship with the EU - outside the Single Market and Customs Union - means that there are practical and procedural changes that businesses and citizens need to get ready for," he said.

"We know that there will be some disruption as we adjust to new ways of doing business with the EU, so it is vital that we all take the necessary action now."

Businesses have been urged to make sure they understand the new rules on importing and exporting goods, including the different rules that apply to trade with Northern Ireland, and to consider how they will make customs declarations on EU trade.

Mr Gove also encouraged travellers to EU destinations from 1 January to take out comprehensive travel insurance, check their mobile phone provider's roaming charges and make sure they have at least six months left on their passports.

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Measures are being put in place around the UK as it prepares to enter its new trading relationship with the EU.

The Scottish government has signed a lease to use a former military airfield in Dumfries and Galloway as an emergency lorry park for up to 240 vehicles if there is disruption at Cairnryan port near Stranraer.

Meanwhile, travellers from Great Britain will need to declare cash of €10,000 (£9,049) or more when entering Northern Ireland from 1 January.

The basics

  • A Brexit deal has been agreed, days before a deadline. It means that the UK and the EU can continue to trade without extra taxes being put on goods
  • What took so long? The UK voted to leave the EU in 2016 and actually left on 31 January 2020, but leaders had until the end of 2020 to work out a trade deal
  • There are big changes ahead. Although it's a trade deal that has been agreed, there will also be changes to how people travel between the EU and UK, and to the way they live and work

The trade deal was reached after months of fraught talks on issues including fishing rights and business rules.

Prime Minister Boris Johnson said it would provide new legislative and regulatory freedoms to "deliver for people who felt left behind".

But fishermen's leaders have accused him of "caving in" and sacrificing their interests. Labour called it a "thin deal" that needed "more work" to protect UK jobs.

Shadow Cabinet Office minister Rachel Reeves said the "bumpy moments" Mr Gove warned about were of the government's own making because it waited to strike the deal "so close to the wire".

She said the government had refused to engage with business on preparations, while dodging questions for months about the recruitment of customs agents and the development of IT systems.

"The government is treating its own incompetence as inevitable," she said.

'Lasting damage'

The SNP said it was "the understatement of the century" that the UK would face disruption, adding that millions of businesses would now face "a mountain of extra costs, red tape, bureaucracy and barriers to trade in just four days' time".

Conservative grandee Lord Heseltine has urged MPs and peers to abstain when voting on the deal, warning it will inflict "lasting damage" on the UK.

The former deputy prime minister said he would "in no way share the endorsement of the legislation", but that he would not vote against it because the consequences of a no-deal would be even graver.

Political parties in Northern Ireland that take their seats in Westminster - the DUP, the Alliance and the SDLP - are set to vote against the deal.

The DUP, which supports Brexit, said its eight MPs would oppose the deal because it did not address "damaging" issues caused by introducing customs checks between Northern Ireland and Great Britain.

Over the weekend, Chancellor Rishi Sunak sought to reassure the City of London that it will not be damaged by the deal.

He said they would be "doing a few things a bit differently" and looking at "how we make the City of London the most attractive place to list new companies anywhere in the world".

The chancellor said the deal was "an enormously unifying moment for our country" and it brought reassurance to those who were concerned about the impact on businesses.

Originally published by
BBC News | December 28, 2020

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