Moving ahead while staying on the right side of the regulator can be a challenge for today’s innovative fintech firms. That is, after all, why the FCA developed its regulatory sandboxes – designed to help smaller fintechs get off the launchpad quickly and compliantly. In this update, we preview some of the key fintech-related regulation likely to be rolled out over 2021.
BNPL regulation
Many shoppers across the UK take advantage of the services of buy now, pay later (BNPL) firms like Laybuy, Klarna and Clearpay to spread the cost of purchases made online or in-store. The concept is simple. Instead of paying on checkout or at the till, customers can have the BNPL provider pay the retailer and then pay it back – without interest – over a few weeks or months.
The unregulated buy now pay later market more than trebled in size in 2020, poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.
Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer. Although the average transaction tends to be relatively low value, shoppers can take out multiple agreements with different providers. With several BNPL providers planning to expand to higher-value retailers, or to offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing.
The Government’s decision to bring BNPL into regulation will mitigate these risks by giving the Financial Conduct Authority oversight of BNPL providers and allowing consumers to escalate their complaint to the Financial Ombudsman Service if things go wrong.
Under these plans, providers will be subject to FCA rules so will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
As a matter of urgency, the FCA is being requested to work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation. Once the necessary powers are obtained the FCA will need to develop a proportionate regulatory framework including addressing how credit information should work within this market.
Passporting
Some of the UK’s biggest fintechs have made use of passporting to operate in the EEA. With Brexit looming, some fintechs were able to shift regulatory responsibility to EEA states, with Ireland and Lithuania among the most popular destinations. As of 31 December 2020, however, the ability to use passporting as a means of operating here in the UK came to an end.
The FCA had previously said that firms using passporting to operate in the UK could continue doing so until they received the proper FCA authorisation. The large number of high-profile fintechs relying on this scheme, however, could be a sign of difficulties ahead. With issues around equivalence still awaiting clarification, the need to comply with different standards in the EU and UK could yet present significant challenges for fintechs looking to grow in Europe.
Banking licences
Securing banking licences has long been a challenge for fintechs, whether the full bank licences held by the likes of Monzo and Starling or the e-money institution licences fintechs like TransferWise hold.
Now that the UK has left the EU, the FCA may want to consider extending the range of licences available. This could attract fintechs who might otherwise be deflected from the idea of operating out of the UK by the more attractive environment on offer across the Channel. Having said which, the UK remains, for now at least, by far the most popular European destination for fintechs.
Open Banking
January 2021 marked the third anniversary of the implementation of the Payment Services Directive II (PSD 2) and of open banking as we now know it. There are already around 2.5 million users in the UK, and as open banking take-up grows, regulation will likely grow with it.
Its increasing popularity in sectors like payments, could signal the need for tighter regulation of open banking to protect consumers’ interests, not least because a persistent lack of trust is one of the main barriers to adoption.
Free from the EU’s fragmented regulation, perhaps the UK can now move a step closer to open finance. The deadline has long since passed for submissions to the FCA’s 2019 Call for Input on the risks and opportunities arising from open finance. So perhaps new open banking regulation could be closer than we think.
“In considering the necessity for new regulation, the FCA will need to strike the appropriate balance of introducing regulation which maximises the possibility of good consumer outcomes and data protection, whilst not overburdening potential third-party providers with red-tape, thereby impeding entry into the open banking ecosystem and preventing open finance from reaching its full potential”.
Jack Williams – Payment Services & Financial Crime Manager
Whatever compliance support you’re looking for within the fast-evolving fintech space, our team has the skills and experience to help you navigate the regulatory landscape.
If you’d like to know more about how we can help you with your fintech, payment services, BNPL arrangements, or any other aspect of FCA compliance, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.
Author, Keith Maner – Compliance & Technical Manager