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Wednesday, 19 January 2022

Tougher Marketing Rules For FinTech Investments In The UK

The Financial Conduct Authority is consulting on tougher rules for the marketing of 'fintech' investments, including investment based‑crowdfunding, peer‑to‑peer (P2P) lending, other 'non‑readily realisable securities', non‑mainstream pooled investments (similar to unlisted investment funds) and speculative illiquid securities, as well as cryptoassets (when proposed Treasury regulations bring them within the financial promotions regime). The consultation ends on 23 March 2022. Firms will have 3 months to comply from publication of the final rules (cryptoasset changes will apply from the date when the Treasury changes apply). Based on experience in the P2P lending sector, the impact is likely to be severe, effectively restricting consumers to bank deposits and expensive listed instruments while shielding incumbent banks and investment firms from competition.

Classification of high‑risk investments.

The FCA intends to divide its rules into those that apply to ‘Restricted Mass Market Investments’ and those that apply to ‘Non‑Mass Market Investments.’ They have not yet applied their Speculative Illiquid Securities rules but may do so later in 2022. 

Consumer journey 

The FCA proposes to strengthen risk warnings and appropriateness tests, ban inducements to invest, introduce positive 'friction' in the investment process to give consumers a chance to reconsider their commitment and 'improve' the classification of different types of clients. 

The role of firms approving and communicating financial promotions

There will be a regulated 'section 21 gateway' for firms who approve financial promotions to ensure those firms have relevant expertise in the promotions they approve and that the quality of financial promotions is high. 

Qualifying cryptoassets

The FCA intends to generally apply the same rules to cryptoassets as currently apply to ‘Restricted Mass Market Investments’ (Non‑Readily Realisable Securities and Peer‑to‑Peer lending agreements), but would not allow ‘Direct Offer’ Financial Promotions of qualifying cryptoassets to be made to self‑certified sophisticated investors. New rules aside, financial promotions relating to cryptoassets will also need to comply with existing financial promotion rules, including the requirements for the promotion to be clear, fair and not misleading. 


The FCA's clear intention is to dampen enthusiasm for certain investments, particularly cryptoassets, among investors who don't understand what they are investing in and/or cannot afford to lose the amount they invest. The FCA explains it this way:

A key part of the strategy is addressing the harm from consumers investing in high‑risk investments that do not match their risk tolerance. This can lead to unexpected and significant losses for consumers and undermine wider confidence in investments, making it harder for all firms to raise capital. We do not want to unnecessarily restrict consumers who want to invest, but we want them to be able to access and identify investments that suit their circumstances and attitude to risk.

As ever, the concern must be that regulated firms and consumers facing these hurdles will be shut out of the markets for innovative products (as has happened with P2P lending). That would leave consumers with low return savings accounts and 'safe' listed products that have both high fees and low returns; and favour incumbent banks and investment firms over new market entrants.

In the UK, at least, there does not seem to be any middle ground... rather like our politics.


Monday, 1 November 2021

New Insolvency Rules for UK E-money and Payment Institutions

The Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021 (SI 2021/1178) will come into force on 12 November 2021 (there is an explanatory memorandum). The new rules provide detailed operating provisions to support the special administration process for payment institutions andelectronic money institutions governed by The Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) which came into effect on 8 July 2021 (there is also an explanatory memo relating to those regs).

Amongst other provisions, the new rules: 

  • Require insolvency practitioners to provide a reasonable notice period before a claims bar date comes into effect. 
  • Clarify the full hierarchy of expenses. 
  • Require notice of a bar date to be given to all persons whom the administrator believes to have a right to assert a security interest or other entitlement over the relevant funds. 
  • Require the special administrator to engage closely with payment systems operators during the special administration. 

The Government consultation response explains the evolution of this legislation.

Friday, 29 October 2021

Trouble At The FCA's Perimeter

The UK's Financial Conduct Authority is often charged with an apparent failure to act amidst a 'scandal' of some description. Its usual defence is that the activity in question lay outside the scope or 'perimeter' of what the FCA is empowered to supervise. The FCA also publishes a "Perimeter Report" pointing out issues that it sees outside the perimeter that it considers it should be given powers to address. Needless to say, that's a lot like having your cake and eating it, but so it goes. Anyhow, aside from the usual suspect of dodgy financial advice through appointed representatives, two areas leapt out at me among those identified in the latest Perimeter Report:

Financial promotions/marketing: The FCA believes that the exemptions for unauthorised persons to market investments to 'high net worth' and 'sophisticated' investors under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO) are no longer fit for purpose, so there need to be significant changes - including the nature of the thresholds for consumers to qualify and self-certify that they qualify as either high net worth or sophisticated. 

Cryptoassets: The FCA is seeing the evolution of 'complex business models' presented as ways for customers to generate returns from cryptoasset holdings, which its believes may need further regulatory or legislative action to address. I'd say that's the understatement of the century, given the recent shriek of alarm from the Bank of England about the threat to financial stability from cryptoassets. I'd say investors are more likely to understand that 'unbacked' cryptoassets (e.g. bitcoin) are very high risk investments, but vulnerable to being misled to believe that a cryptoasset is somehow "backed" by other assets (i.e. 'stablecoins') or somehow include rights to other assets or income.

The problems identified here are likely to have arisen from investigations or complaints where the FCA would particularly like to have acted but didn't immediately have all the powers it would have liked. Therefore, it also seems likely that these areas will be the subject of future enforcement if those powers are forthcoming...

Friday, 10 September 2021

UK Diverging from EU on Strong Customer Authentication?

As someone who's trying to maintain a financial regulatory practice on both sides of the Irish Sea, I'm watching the Brexidiots like a hawk to spot divergence, particularly in areas that used to require maximum harmonisation, like e-money & payment services. So it's awkward that the FCA recently said that it will not include in its own guidance the European Banking Authority's views on features that would or wouldn't meet the test of  'inherence' in relation to strong customer authentication, but won't yet say why.

Strong (or 'two factor') authentication is the security feature that confronts users when they initiate a bank transfer, for example. It should already have been applied in relation to e-commerce payments, but regulators have repeatedly agreed to kick that can down the road to allow online merchants to prepare. The latest UK deadline is 14 March 2022. 

There are actually three potential factors to strong customer authentication, but only two need to be applied from Inherence (something the user is), Knowledge (something only the user knows) and Possession (something the user possesses).

In an effort to be helpful, the EBA opinion of June 2019 (paras 17-23) went into some detail as to what features satisfy each factor, with Inherence being perhaps the hardest to pin down since it's an area of fast-moving technological development in biometrics etc. 

By refusing to say why it won't incorporate the guidance, the FCA is perhaps hedging its bets as to whether the EBA's view is outdated or will be rolled back. But not to say whether it agrees or disagrees is hardly helpful to those trying to develop and test a solution to go live by 14 March.


Monday, 12 July 2021

'Slight Delay' To EU Crowdfunding Regulation

The European Securities and Markets Authority has written to the European Commission urging clarificiation of some important interpretation issues relating to the EU Crowdfunding Regulation and suggesting a 'slight delay' to the proposed implementation date of 10 November 2021. ESMA says the delay would ensure that all the key technical standards are available to applicants and national authorities. I have summarised the letter for Leman Solicitors.  

Let me know if you need assistance with any application for authorisation.


Friday, 25 June 2021

Payment and E-money Institution Insolvency Regulations Take Effect On 8 July

As covered in December, the Payment and Electronic Money Institution Insolvency Regulations 2021 were passed on 17 June and take effect on 8 July 2021.

While the Regulations mainly deal with an insolvency scenario, it’s worth noting there is also provision for the Financial Conduct Authority to seek a special administration merely where that is ‘fair’ (see Regulation 9(1)(b) and 9(3)). This might assist in cases where the institution is solvent but otherwise proving difficult.

Please let me know if I can help.

Monday, 24 May 2021

Deadline For SCA On E-commerce Transactions Slips Again

Once upon a time, the second Payment Services Directive required mandated the introduction of 'strong customer authentication' (SCA) - also known as 'two factor authentication' or 'multi-factor authentication' - for remote and electronic payment transactions from 14 September 2019. But fear that consumers will abandon online transactions, lack of industry preparation and then the pandemic have seen this rather battered can being kicked steadily further down the road. The UK's Financial Conduct Authority has now declared the latest 'deadline' to be 14 March 2022.

This time it might be serious.