Anti-Greenwashing Guidance

Source

The UK's Financial Conduct Authority is proposing guidance for firms making sustainability claims in their promotional material, to avoid exaggerated and misleading messages. This includes situations where non-FCA authorised firms are getting promotions approved by FCA-authorised firms. The guidance will be finalised in Q1 2024, to take effect with the anti-greenwashing rule on 31 May 2024.

References to 'sustainability' must be:

1. Correct and capable of substantiation;
2. Clear and presented so as to be understood;
3. Complete and not omit/hide key information;
4. Take into account the full lifecycle of the product;
5. Fair and meaningful in relation to any comparisons made.

The Anti-greenwashing rule provides:

ESG 4.3.1 R (1) This rule applies to a firm (whether it is undertaking sustainability in-scope business or not) which: 

(a) communicates with a client in the United Kingdom in relation to a product or service; or 

(b) communicates a financial promotion to, or approves a financial promotion for communication to, a person in the United Kingdom.

(2) A firm must ensure that any reference to the sustainability characteristics of a product or service is: 

(a) consistent with the sustainability characteristics of the product or service; and  

(b) fair, clear and not misleading.

Anti-fraud and Complaints Handling in UK Payment Service Providers

The UK's Financial Conduct Authority has published a summary of its findings of its review of anti-fraud controls of UK payment service providers, particularly focused on Authorised Push Payment (APP) fraud. Let me know if you need assistance in this area.

E-money and payment institutions should at least consider these findings and recommendations as part of their continuing work on staying ahead of fraudsters, even if they consider their systems to be already robust. There is more detail in the FCA web page, but in summary, they found: 

• an insufficient focus on delivering good consumer outcomes in many of the firms we reviewed 

• management information and actions often focused on commercial risk appetite, rather than customer impact and treatment 

• significant scope in many firms to improve the support provided to victims of fraud including from the first point of contact. In many cases, firms need to do more to enable customers to report fraud easily and promptly 

• poor complaint handling including firms often taking too long to respond to customer complaints 

• customers provided with decision letters that were sometimes unclear, confusing, or included unhelpful and, on occasion, accusatory language 

• limited evidence that firms are appropriately taking account of characteristics of customer vulnerability when making decisions about fraud claims and complaints.

Let me know if you need assistance in this area.

Do Payment Account Balances Held By A Payment Institution Without A Payment Order Constitute E-money?

Interesting opinion in ABC Projektai UAB v Bank of Lithuania, where the regulator had said that a payment institution had engaged in e-money issuance merely by holding funds for which it had received no payment orders. I've advised on this issue before, but this post is not legal advice, so let me know if you need it.  

The Advocate General's view is that a payment institution which holds funds without executing a payment order will infringe Articles 78 and 83 of PSD2 (as locally implemented) which govern the timing of receipt and execution of payment orders; potentially breach the service contractual for the operation of the payment account; and may trigger liability for non-/late execution under Article 89. 

But the funds would not be somehow converted into e-money "merely because funds have been transferred to a payment account and are kept in that account for the execution of future payment orders." 

There was also no e-money involved because the steps required for issuance of e-money under the E-money Directive (as implemented locally) were neither contemplated by the parties nor actually followed. 

It's worrying that there were in fact no payment orders (rather than, for example, existing payment orders that were not yet deemed to have been received by virtue of article 78(2) PSD2). The PSP had said that it had warned customers to provide payment orders or their funds would be returned (though the firm had not actually returned them...😬). Consistent with the AG's overall reasoning, however, the view must be that this will only amount to a breach of PSD2, rather than somehow convert the payment account balances into e-money. 

FCA's Final Warning To Crypto Firms On Marketing and Money Laundering

The UK's Financial Conduct Authority has issued a "final warning" to all firms marketing cryptoassets to UK consumers, including firms based overseas, that it will strictly enforce the new 'financial promotions' restrictions that take effect on 8 October 2023. Among the FCA's concerns, in particular, is the fact that overseas firms with UK customers have failed to engage with the process of introducing the restrictions. Of 150 overseas firms surveyed by the FCA, only 24 responded. The FCA has updated its Warning List accordingly. In addition to criminal prosecutions for breaching the restrictions, the FCA envisages actions to recover the proceeds of crime from those who receive money from offending firms, as well as prosecutions for related money laundering offences. I've summarised the FCA's concerns below for information purposes. This note does not constitute legal advice. If you need advice on any of the matters raised, please get in touch.

What is a financial promotion?

A 'financial promotion' basically means any invitation or inducement to engage in a regulated activity. This could be a feature of any customer communications, marketing activity, social media posts, advertising or part of sponsorship arrangements, for example. 

What is the main restriction?

Firms lacking the appropriate authorisation or registration must only communicate to UK residents financial promotions that either fit an exemption or have been approved by an FCA authorised firm (who have to comply with their own financial promotions rules). 

The FCA expects authorised firms who are considering approving cryptoasset financial promotions to notify the FCA before doing so.  

Depending on the type of product and related activity involved, there may be different promotional rules that the approving firm must check that the promotion complies with before giving approval.

Crypto firms which cannot legally communicate financial promotions to UK consumers will be expected to have robust processes to prevent UK consumers accessing and responding to their financial promotions, including geo-blocking UK consumers, clear statements that their services are not available to UK residents, on-boarding and KYC/AML checks for UK addresses, preventing the use of UK-based payment methods, and ongoing monitoring. 

What happens if there's a breach?

Breaching the financial promotions restrictions is a criminal offence. 

In turn, the FCA considers that any benefits obtained from illegal financial promotions could be criminal property, so anyone receiving or dealing with such proceeds of crime may be implicated in money laundering. Some may also commit an offence where they breach requirements to report suspicious activity. In this context, the FCA will be looking at funds flows such as: 

• the fees generated by app stores, social media platforms, search engines and domain name registrars from hosting illegal financial promotions; 
• investments made due to illegal financial promotions; 
• receipt of payments under advertising, co-marketing and sponsorship deals; and 
• fees charged by payments firms or other intermediaries for services to unregistered cryptoasset businesses that generate income through illegal financial promotions. 

The FCA would likely begin its enforcement activity with an alert on the FCA website and by seeking to remove or block offending promotions, in addition to targeting intermediaries, social media platforms, search engines, app stores, domain name registrars, hosting providers and payment service providers who support the activities of offending firms.

What if I have UK residents as customers right now?

The FCA explains that firms who are at risk of non-compliance may communicate with their existing UK consumers for a limited time but only to allow those customers to transfer, withdraw or sell their existing assets, which must be communicated in a way that does not breach the financial promotion requirements and clearly explain how consumers can use each option and any associated fees, costs and charges. The FCA considers it unsustainable for unregistered cryptoasset firms to maintain a longer-term relationship with UK consumers who cannot be shown financial promotions. 

This note does not constitute legal advice. If you need advice on any of the matters raised, please get in touch.

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Reverse Solicitation

My piece for Ogier Leman on 'reverse solicitation' is here.

Any business dealing with residents of another country faces the potential risk that the authorities in the other country might decide that it is somehow actively operating in that other country, rather than only dealing with foreign customers in or from its home territory after being approached by them ('reverse solicitation'). This could mean action being taken by a foreign consumer, ombudsman or regulator, including action in the civil or criminal courts of another country. A recent Irish case has added some colour to the factors that the European Court of Justice ('CJEU' or 'ECJ') has previously said may show that a business is actively doing business in another country; and I've added a list gleaned from guidance applicable to financial services in particular. This post is for information purposes only. If you need advice, please get in touch.

The ECJ has held that a firm based in one EU Member State won't be doing business in another Member State just because its website is accessible in the other country. Nor will it be enough for the firm's website to display its own email/ geographical address, or phone number (without an international dialing code), because that information is needed by consumers in the firm's own home country. 

Instead, a firm must have somehow 'manifested' or demonstrated its intention to establish a commercial relationship (contract) with consumers in the other country. There must be clear expression of the intention to solicit custom from those foreign consumers. 

The sort of objective factors that the ECJ held to be relevant to that question include: the international nature of the business activity (e.g. tourism); telephone numbers with the relevant country code; a web address with the other country's top-level domain name (e.g. “.de” or ".fr"); itineraries to get to the foreign place where the relevant service is provided; mentions/testimonials of clients based in other countries; and using a foreign language and/or currency not also commonly used in the firm's home country.

The Irish courts have also pointed to these factors in various cases with unsurprising results. But a recent Irish case adds a bit more colour... 

A UK-based firm organised group cycling tours in foreign countries, but not the travel to those countries. So the consumers were never going to be using the firm's service in the UK. Customers had to make their own way to where the tours operated locally. The firm stipulated that it was only responsible for the tour from the appointed start time at the meeting point, but it did also arrange the transport of customers from the foreign/local airport to the meeting point. 

While there was evidence that the booking process did not target a customer's specific country of residence (e.g. Ireland), the firm was aware of the country they had come from and this did not have to be from the UK. The website/email addresses ended in ".co.uk" but the contact phone number carried the international "+44" country code. Customer testimonials also stated the customer's nationality, including one from Ireland. Prices were stated in currencies other than GBP, including the Euro, and there was a currency conversion feature on the website, to enable customers to figure out how much they would have to pay in their own currency when paying the price in GBP. Prior to booking, a customer also had to create an online account, giving details of their city, country of residence and post code (not just provide those details in the form to verify the payment card details being used, for example, which may only go to the card acquirer rather than the merchant). 

So, the Irish court held that, before the conclusion of any contract with the consumer, it was apparent from the firm's website and overall activity that the defendant intended to do business with - and enter into contracts with - consumers in Ireland (among other places).

These are not the only factors to consider, of course. For example, the EU's financial services 'passporting' requirements and Brexit have provided opportunities for UK and EU authorities to consider what factors - alone or together in a specific context - could mean that an EU financial services provider may be wrongfully targeting the UK market or vice versa:

• firms must have a 'head office' and hold board meetings in their country/territory of residence/authorisation, so any of those features that are instead based in the other jurisdiction would be problematic from that standpoint alone (i.e. those who decide the firm’s direction, make material management decisions on a day-to-day basis; the finance, settlement and compliance functions - ‘central administrative functions’ - and their systems and records),
• the website should be hosted on local servers in the 'home' territory (and certainly not in any other country where foreign customers are resident);
• no marketing, advertising or services should be directed specifically at other countries/territories or their residents;
• there should not be a foreign language version of the website or customer communications or support specifically for the relevant foreign customers;
• management and staff should not visit any foreign customers or service providers for operational or marketing purposes or to resolve disputes;
• foreign customers should only be able to approach the firm's website or staff in its 'home' territory;
• the firm should not set cookies on the devices of of foreign customers or otherwise monitor their behaviour outside the firm's home territory;
• the firm should not provide services beyond the scope requested by the foreign customer approaching the firm and they should have to request the service each time they wish to use it;
• the firms should keep records (not just a tickbox or contractual provision) showing that it was approached by the customers, not the other way around; 
• the firm should have no agents, intermediaries or outsourced/delegated services outside its home territory or be a member of a foreign payment system, trading exchange/venue or trade body - or vice versa - but could use services in other countries (e.g. hold foreign bank accounts or rely on advice from foreign professional firms);
• being part of a wider corporate group based outside the territory or being funded from outside the territory may also be problematic; 
• customer contracts must not be subject to any law of a country other than the firm's home state or specifically refer disputes to any other jurisdiction;
• a firm should not deposit its clients' money/assets in any institution outside its home territory, or safeguard customer funds outside its home territory (other than as incidental to dealing appropriately with foreign customers in or from the home home territory, supported by correspondent services outside the country where necessary for that purpose).

This post is for information purposes only. If you need advice, please get in touch.

APCOA's Parking Problem

Imagine my surprise when I received a £140 debt recovery notice for a £1 parking charge that I'd paid via APCOA's parking app, alleging “parking without a valid payment or permit”. I called the collection agency (Debt Recovery Plus) and explained that both the app and my credit card statement show that I paid the £1 to park my car at the relevant location (for the second year running, I might add). But, "Aha!" they said. We can see that the registration number entered in your version of the APCOA app has one letter different to your car's actual registration number (an "O" instead of a "P"), so neither the payment APCOA took from your credit card nor the permit it issued to you were valid. That means APCOA can now charge you a £140 penalty!

There are so many things wrong with this that I'm actually kind of hoping it goes to court. Here's the gist of what I've written to all concerned (yet their processes grind on): 

1. APCOA knew of the mistake (through its licence plate recognition system), yet had proceeded to charge my credit card by submitting the payment to its card acquirer as a valid transaction; and duly issued the parking permit for my vehicle, regardless of the typo in the app (for the second year running). My contract debt of £1 was discharged. The end. Everything that followed was of no legal consequence at all, void, unenforceable. You cannot somehow revive or rely on a contract debt once it is discharged. It's irrelevant that I missed a deadline in a later document APCOA wasn't entitled to issue in the first place. The “terms and conditions of use” at the location don't entitle APCOA to collect a parking fee of £1 and then seek payment of further charges as if it had not already been paid. If English contract law were to allow that, the wheels of commerce would come to an abrupt halt. 
2. If APCOA regarded the typo in the app as a problem at all, then it had elected not to take the point and reject my payment, so it could not later claim that the typo somehow rendered the attempted transaction invalid.
3. APCOA had suffered no loss, because they had received the £1 charge and not refunded it.
4. APCOA is also estopped by its conduct from claiming that the payment/permit was invalid, issuing the parking charge notice and other enforcement activity. By issuing the notice with the correct registration at my address, APCOA (and later the collection agency) demonstrated that it was on notice that I was the registered keeper of the relevant vehicle at the relevant location on the day in question and that I had paid a £1 parking charge using my card (also registered to the app).
5. To charge 140 times the amount of a contract debt is extravagant and unconscionable in comparison with any legitimate interest, particularly in circumstances where APCOA had in fact accepted payment for a £1 charge and both it and its collection agency were aware of an obvious mistake. The charge is also not a genuine pre-estimate of any loss, since there is no loss!
6. The debt recovery firm is also on notice of the obvious mistake and is similarly estopped, but has no better claim to payment than APCOA in any event.
7. To the extent that APCOA seeks to rely on the “terms and conditions of use” as the basis for additional charges, those terms and conditions fail the fairness and transparency tests and/or are otherwise unenforceable under the Consumer Rights Act 2015. 
8. Any contract formed on the day for the use of the car park would be rectifiable for obvious mistake to cure the minor typographical error in the reference to the registration number. Alternatively, APCOA breached the contract by collecting my payment but failing to apply it to the vehicle that it knew to be the one I had parked, for which the damages are at least equal to the amount they subsequently try to claim from me in charges (plus my costs). 
9. The debt collection agency has also misrepresented that the UK Supreme Court decision in Cavendish Square Holding BV v Makdessi [2015] UKSC 67; [2016] AC 1172 entitles APCOA or the agency to act as they have. 
10. Both APCOA and the debt recovery agency have acted wrongfully on several occasions in pursuing the amount of the charge. In all of the circumstances, APCOA and its collections agency are in breach of their duty not to trade unfairly under The Consumer Protection from Unfair Trading Regulations 2008. 

While some of the remedies to which I am entitled may well be beyond the jurisdiction of the small claims court, they would include:

• judgment in my favour on any attempt to recover the charges;
• An order that each of the parking charge notice and debt recovery notices are void and/or unenforceable. 
• An order that any contract formed by my App and the terms and conditions of use of the car park at the Location should be rectified by the court to cure the minor typographical error in the reference to the registration number. 
• Damages equivalent to all amounts sought by APCOA and its collections agent and my costs and expenses incurred, including (where recoverable under the relevant court rules) legal fees and expenses in defending any proceedings.   

I have written to APCOA, the debt collection agency and APCOA's Managing Director for UK and Ireland, putting them on notice of the above and reserving all my rights and remedies. So far, their highly automated processes grind on...

EU Expands Open Banking to Open Finance

My piece for Ogier Leman on the EU's proposed Open Finance Regulation is here.

As part of its review of the second Payment Services Directive (PSD2), the EU consulted on whether to expand the concept of 'account information services' to other types of online financial services. As a result, the EU is now proposing a financial data access regulation (Open Finance Regulation) that will give a wider range of financial services customers new ways to extract, use and share their account data independently of the service provider who holds their account. For instance, you could get an independent adviser to analyse all your finances - savings, pensions and mortgages/loans - in detail at any time, including creditworthiness data, rather than rely on periodic summaries from the primary service providers. As a regulation, it will apply directly applicable in all Member States to ensure consistency, without needing to be 'transposed' under local law. Firms will have 2 years to prepare, although 'financial data sharing schemes' will have an earlier window in which to notify the local regulator of their activities. The Regulation is summarised below for information purposes, if you require advice on its application please let us know. 

Barriers to Data Access

Most financial service providers rely on knowing more than you about your use of their services, so they don't give you the same access to your data or convenient ways to share that data with advisers or other service providers.  Without secure ways to share the data, you won't do it or can't figure out how to do it - which is costly and not standardised.

Consistent with other EU legislation

The Open Finance Regulation not only builds on 'open banking' under PSD2, but is consistent with data access and portability rights under GDPR, the Data Governance Act (improving interoperability between data platforms), the Digital Markets Act (tackling the power of gatekeeper platforms), the proposed Data Act to provide data access rights to Internet of Things (IoT) data for users and providers of related services), the EU retail investment strategy (to provide safeguards in the use of retail investor data) and the Digital Operational Resilience Act (rules on cybersecurity and operational resilience in the financial sector).

Preferred Approach

The EU has chosen the following approach from a wide range of options considered by an experts group and other stakeholders. The Open Finance Regulation will:

• require data holders to provide customers with 'permission dashboards' to grant access to selected customer datasets;
• set eligibility rules on who can access customer data;
• empower European authorities to issue guidelines to protect consumers against unfair treatment or exclusion;
• require common standards for customer data and interfaces (APIs) for access to that data; and
• require agreement on compensation and contractual liability.

Cost/Benefit

The Regulation is considered to be a necessary transition that will pay off in the medium to long term. Big providers will lose some of their 'hold' over customers, while providing new entrants access to data that will promote more customer activity and help grow the overall financial services market. 

A key example would be enabling you and your finance providers to figure out how to fund a sustainable lifestyle and retirement, make the decisions to meet your goals and obtain the relevant services to achieve them. 

Creating standard ways to efficiently share data will enable less form filling for customers and better productivity for service providers. 

The estimated total annual benefits from Open Finance for the EU economy ranges from €4.6bn to €12.4bn, including a direct impact on the financial data sector of €663m to €2bn. The overall estimated cost could be €2.2bn to €2.4bn initially and ongoing annual costs of €147m to €465m.

Specific Features of the Open Finance Regulation

Scope

In this context 'customer data' means personal and non-personal data that is collected, stored and otherwise processed by a financial institution as part of their normal course of business, whether provided by a customer or generated as a result of customer interaction with the institution. So it includes access to, and processing of, business-to-business as well as business-to-consumer data, at the customer's request.

Certain categories of customer data may be accessed, shared, and used; with specific rights and obligations of defined data users/holders and authorised 'financial information service providers' (who provide information services as a regular occupation or business activity). 

The specific sets of data relate to mortgages, savings, investments, pensions, credit information and so on; and the types of firms in scope are regulated financial institutions - as well as authorised financial information service providers - when acting as holders or users of those types of data. 

A 'data holder' must make available the specified type of data to customers and their nominated 'data users' at the customer's request, in real time. 

Where personal data is involved, the request must also align with a valid legal basis for that data holder to undertake the requested processing under the General Data Protection Regulation (GDPR). 

Data users receiving data at the request of customers should only access the customer data made available to them, and only for the purposes and the conditions agreed with the customer. 

The customer’s personalised security credentials must not be accessible to other parties, nor can the data be stored longer than necessary.

Responsible data use and security 

The Regulation also guides firms on how they should use data for given use cases, and prohibits any discrimination or restriction in the access to services as a result of the use of the data. 

Customers can't be refused access to financial products just because they refuse to grant permission to use their data. 

Data holders must provide the customer with a 'permission dashboard' that meets certain criteria to monitor, manage and withdraw permissions the customer's gives to data users.

Creation and governance of financial data sharing schemes 

Financial data schemes are those whose aim is to bring together data holders, data users and consumer organisations. A scheme should develop data and interface standards, 'coordination mechanisms' for the operation of permission dashboards and a standardised contractual framework governing access to specific datasets and rules on governance, transparency, compensation, liability, and dispute resolution. 

Such data-sharing schemes must be notified to the local regulator; and benefit from a passport for operations across the EU. 

Data holders must be entitled to compensation for making the data available to data users, according to the terms of the scheme of which they are members. 

Financial information service providers. 

Financial information providers must apply for authorisation and meet various operational requirements, appoint a legal representative and may passport their services throughout the EU/EEA.

The Regulation will apply 24 months after its entry into force, except that 'financial data sharing schemes' will be able to apply 6 months in advance months to be ready for the Regulation to go live.

This note summarises the Regulation for information purposes, if you require advice on its application please let us know. 

FCA Updates Social Media Guidance To Cover Crypto, New Platforms And Influencers

Hard on the heels of the EU adding a chapter on online marketing of financial services (including 'dark patterns' and influencers) to the Consumer Rights Directive, the UK's Financial Conduct Authority is also updating its 2015 guidance on financial promotions in the social media to address influencer marketing. This post summarises the FCA's proposed new social media guidance for information purposes only. If you require legal advice, please get in touch.

In substance, the FCA's guidance remains the same but adds specific guidance on 'new' design features and channels, such as influencers; and explains the impact of the new Consumer Duty.

The core principles of the FCA's view of social media remains, of course, that financial promotions must be fair, clear and not misleading as well as "standalone compliant": each stage of a financial promotion must comply with the financial promotion rules relevant to the type of business being promoted. Certain features of the social media have always raised issues, whether it be character limits, small or scrolling banners: 

When assessing the compliance of a promotion that is viewed via a dynamic medium (such as Instagram stories), we assess the promotion as a whole and take a proportionate view based on the number of frames and where information about risk is displayed within the promotion. To meet our expectations regarding prominence, firms should aim to display the key information about risk upon a consumer’s first interaction with the promotion and the warning should be displayed for a sustained period.

Complex services, like debt counselling may not lend themselves to social media promotion at all.

Use of memes may also be inappropriate or impracticable, given the nature of the invitation or inducement in the meme and/or the need for risk warnings and other information to be prominent and 'balanced'.

The Consumer Duty raises fresh considerations:

Firms advertising using social media must consider how their marketing strategies align with acting to deliver good outcomes for retail customers. All the cross-cutting rules will be relevant to social media promotions, and firms should take into account how promotions that do not support consumer understanding may cause consumers to buy products that are unsuitable for them, leading to foreseeable harm... 

Firms’ communications should support and enable informed decision-making, equipping consumers with the right information in a timely way. Firms must also consider how they tailor communications to account, for example, for the likely audience on social media and the features of different platforms.

Firms remain responsible for any original non-compliance, even if a promotion is forwarded or shared (whether as part of a formal affiliate programme or by random recipients). This can itself trigger a breach of financial promotions rules (e.g. forwarding to the wrong type of investor). For that reason, the social media may not be an appropriate channel at all.

And just because somebody 'likes' an ad or 'follows' the firm in the social media does not mean they are no longer protected from 'cold calling':

...a financial promotion is likely to be non-real time if it is made or directed at more than one recipient in identical terms, creates a record which is available to the recipient at a later time, and is made by way of a system which in the normal course does not enable or require the recipient to respond immediately. This means channels like live-streams or gaming steams are likely to be considered a non-real time promotion and be subject to the full scope of our financial promotion rules.

A specific chapter of the guidance covers influencers, who have also been the target of the Advertising Standards Authority.

This post summarises the FCA's proposed new social media guidance for information purposes only. If you require legal advice, please get in touch.

EU Payments Regulation: Updating EMD2 and PSD2

My piece for Ogier Leman on the EU's proposal to replace existing directives on e-money and payment services is here.

As reported last July, the EU has been reviewing the way it regulates payment services. That process has now resulted in a proposal for a new legislative approach: a directly applicable Regulation (PSR3) governing how payment services must operate and a Directive (PSD3) governing the licensing and supervision of payment service providers, which will need to be transposed into local law. There is also a proposal to regulate the sharing of financial data, which we'll cover separately. The differences in approach are broadly summarised below for information purposes. It is not yet fully clear when the proposed legislation will be finalised or take effect. If you require legal advice on the potential impact, please let us know.

How does the EU regulated payment services now?

Payment services are currently regulated under a single Payment Services Directive (PSD2) that is applied by local legislation in each Member State. Electronic money issuers are regulated partly under the second Electronic Money Directive (EMD2), also implemented in each Member State, and their services must also comply with PSD2. These are 'maximum harmonisation' directives, meaning that Member States may only deviate when regulating within their scope to the extent they are expressly permitted to do so.

Has PSD2 been successful?

PSD2 has helped with fraud prevention, via the Strong Customer Authentication (SCA); and has improved efficiency, transparency, competition and choice for customers. 

Problems remain, however:

• an imbalance between bank and non-bank PSPs (e.g. in terms of direct access to key payment systems); 
• limited uptake of payment initiation and account information services (‘open banking’ or OB); 
• many services remain national rather than cross-border; 
• anticipated cost reductions have not fully materialised;
• consumers are still at risk of fraud and lack confidence;
• open banking needs work;
• local regulators have inconsistent powers and obligations;
• a fragmented internal market for payments results in “forum shopping”.

As a result, the EU has four main objectives in relation to payment services:

1. Strengthen user protection and confidence in payments;

2. Improve the competitiveness of open banking services;

3. Improve enforcement and implementation in Member States;

4. Improve (direct or indirect) access to payment systems and bank accounts for non-bank PSPs.

The EU plans to meet these objectives through a directly applicable Regulation and a Directive that must be implemented in each Member State.  

Specific proposals - New Regulations (PSR3)

Scope and definitions

PSR3 won't change the list of payment services in PSD2 and leaves the exclusions largely unchanged (although there are potential issues relating to the commercial agent's exclusion, given the addition that the agreement appointing the agent must give the payer or payee "a real margin to negotiate with the commercial agent or conclude the sale or purchase of goods or services"). There is also an addition to the group company exclusion to also allow for one company to collect funds from others within the group to pay them away to a third party PSP.

There are more definitions and clarifications of certain terms (new definitions of Merchant Initiated Transactions (MITs) and of Mail Orders or Telephone Orders (MOTOs)). 

There's an attempt to differentiate between ‘initiation of a payment transaction’ and ‘remote initiation of a payment transaction’.

PSP Access to Payment Systems/Accounts

Payment system operators must grant access to PSPs on proportionate, objective and non-discriminatory grounds. 

Rules concerning PSP rights to account with a credit institution are reinforced (given the importance for them to have a bank account to obtain their license) for institutions and their agents and distributors. 

Transparency of conditions and information requirements

Member states will no longer be able to flex the limits for exempting low-value payment instruments and e-money from certain information requirements.

Customers must be given notice of Alternative Dispute Resolution procedures in contract terms that apply to single payment transactions.

PSPs must unambiguously identify the payee, including any commercial trade name in payment account statements. 

Where payment services are offered jointly with supporting technical services any termination fees that apply to the technical services must also be in the payment services contract.

There are additional information requirements for domestic ATM withdrawals.

PSPs must provide customers sending money from the EU to non-EU countries with the estimated time funds will be received by payee's PSPs; and the estimated currency conversion charges must be expressed in the same way as for credit transfers within the EU (a percentage mark-up over the latest available euro foreign exchange reference rates issued by the ECB).

Rights and obligations 

The prohibition on surcharging customers for using certain consumer payment methods extended to credit transfers and direct debits in all currencies of the EU (though member states - and the UK - have implemented such bans with differing scope in any event).

The rules for merchant-initiated transactions (MITs) and direct debits will have the same consumer protection, such as refund rights.

Open banking (account information services and payment initiation services)

Key changes here include: 

• a dedicated interface for open banking data access;
• removing the requirement on account servicing PSPs (ASPSPs) to maintain a ‘fallback’ interface. 
• ASPSPs must offer customers a “dashboard” allowing the withdrawal of data access from any given open banking provider.
• confirmation on the availability of funds has been removed as a stand-alone open banking service, due to lack of demand.

Authorisation of payment transactions and 'push payment' fraud

A payee's PSP must, on request, provide the customer with a service that checks that the unique identifier of the payee matches the name of the payee as provided by the payer, notifying the payer's PSP of any discrepancy, so it can alert the payer. Under SEPA, a similar provision is proposed for discrepancies between the name and unique identifier of a payee for instant credit transfers denominated in euro. 

For consistency, the new provision will also apply to ordinary credit transfers in all currencies of the Union and instant credit transfers in currencies which are not in euro. 

The notification must be given before the payer finalises the payment order and before the PSP executes the credit transfer. The user remains free to decide whether to submit the payment order for a credit transfer in all cases.

PSPs must not unilaterally increase the spending limits on payment instruments.

Where funds are blocked on a payment instrument for payment transactions where the amount isn't known in advance, the amount blocked must be proportionate to the amount reasonably expected at the time of blocking; and the payee must inform the blocking PSP of the exact amount of the payment transaction immediately after delivery of the service or goods to the payer. 

A PSP can only refuse to refund an unauthorised payment transaction for which it is liable where it has reasonable grounds for suspecting fraud by the payer, in which case the PSP must provide the justification and indicate the bodies to which the payer may complain. 

A payer's PSP will be liable for the full amount of a credit transfer where the PSP has failed to notify the payer of a detected discrepancy between the unique identifier and the name of the payee provided by the payer. 

A PSP will be liable where a consumer has been manipulated into authorising a payment transaction by a third party pretending to be an employee of the consumer’s PSP using lies or deception. 

An obligation for electronic communications services providers to cooperate with PSPs is introduced, with a view to preventing such fraud. Where the liability is attributable to the payee's PSP, it must refund the financial damage incurred by the payer's PSP. 

Strong Customer Authentication (SCA)

Technical service providers and operators of payment schemes will be liable where they fail to support SCA.

A payer shall not bear any financial losses where either their PSP or the payee's PSP applies any of the exemptions from the need for SCA (e.g. for up to 5 contactless transactions).

PSPs must have transaction monitoring mechanisms for the application of SCA and to improve the prevention and detection of fraudulent transactions. The monitoring must take into account the customer's normal use of the personalised security credentials, including environmental and behavioural characteristics related to the customer's location, time of transaction, device being used, spending habits and the online store where the purchase is carried out.

PSPs may exchange personal data, like unique identifiers of a payee, subject to information sharing arrangements, subject to a data protection impact assessment and, where necessary, prior consultation with the local regulator.

SCA is needed for MITs at set-up of the mandate, but not for subsequent MITs. 

Only the non-digital initiation of a payment transaction can escape the SCA obligations, so some MOTO transactions could be caught. But payment transactions based on paper-based payment orders, mail orders or telephone orders placed by the payer should still be subjected to security standards and checks by the payer's PSP to prevent circumvention of SCA requirements. 

The scope of SCA exemption for direct debits has been narrowed; while a new obligation requires SCA where a mandate is placed through a remote channel with the direct involvement of a PSP.

SCA is only required for account information services on the occasion of the first data access; but must be applied , at least every 180 days where customers access aggregated account data on the AISP’s domain.

Provisions have been added to improve the accessibility of SCA, including for persons with disabilities, older persons, persons with low digital skills and those who don't have access to digital channels or a smartphone.

There is a provision requiring payment service providers and technical service providers to enter into outsourcing agreements in cases where the latter provide and verify the elements of SCA (note that such outsourcing agreements, if regarded as 'critical or important' must include certain provisions under EBA guidelines).

Execution of payment transactions

In cases where a payment initiation service provider (PISP) provides an incorrect unique identifier of a payee, the PISP is liable for the amount of the transaction.

Data protection

A new provision defines the substantial public interest for which processing special categories of personal data could be necessary in this context.

Product intervention powers of the European Banking Authority

The EBA may temporarily ban the sale of certain payment products that present certain risks on the basis of specific criteria.

Transition

Basically, the PSR3 will apply 18 months and 20 days after publication in the Official Journal.

Specific Proposals - New Directive (PSD3)

Scope and definitions

The new Directive repeals EMD2 and integrates E-money institutions (EMIs) as a sub-category of payment institutions (PIs). 

PSD3 contains provisions relating to cash withdrawal services provided by retailers (without a purchase) or by independent ATM deployers will.

PSD3 governs access to the offer of payment services and electronic money services by PIs but not by credit institutions (banks). 

Licensing and supervision of PSPs

The procedures for application for authorisation vs registration and controls on ownership are mostly unchanged but consistent for all types of PI (including ex-EMIs) and a winding-up plan ('living will') must be submitted on application. 

PISPs/AISPs may hold initial capital instead of a professional indemnity insurance (which can be hard to obtain). 

Requirements for initial capital are updated for inflation since 2015 (except for PISPs): €150,000 for most PIs and €400,000 for those issuing e-money. Ongoing capital ('own funds') calculations remain the same (even for ex-EMIs).

Safeguarding rules for PIs are unchanged (and apply to e-money issuers) except for the extra option of safeguarding in an account of a central bank (at the CB's discretion); and PSPs must endeavour to avoid concentration risk (with EBA regulatory technical standards on risk management of safeguarded funds). 

There are more detailed provisions on internal governance, including EBA guidelines.

Provisions regarding agents, branches and outsourcing are unchanged, but with a new definition of e-money 'distributors' and related provisions aligned with those applicable to agents.

Provisions on cross-border provision of services by PIs, and the supervision of such services are broadly unchanged except for specific provisions where three Member States are involved (where the PI is established in one state, has an agent in another which provides services in a third Member State on a cross-border basis).

Cash Withdrawals

There's an exemption from PI licensing for operators of retail stores that offer voluntary cash withdrawal services without a purchase on their premises up to EUR 50 (to avoid unfair competition with ATM deployers).

Distributors of cash via ATMs who do not service payment accounts (“independent ATM deployers”) only need to register rather than be fully licensed as PIs.

Transition arrangements

Existing licenses for PIs and EMIs are “grandfathered” for 30 months after PSD3 enters into force (i.e. one year after the deadline for Member States to transpose the directive into local law on condition that they apply for a license under PSD3 no more than 24 months after entry into force).

PSD3 is a full harmonisation directive. The deadline for Member States to transpose it will be 18 months after entry into force.  A review report must be presented 5 years after the entry into force, looking specifically at the possible extension to 'payment systems' (which are regulated by the UK, for example) and 'technical services', as well as the impact of the safeguarding rules on deposit guarantee schemes.

The differences in approach are broadly summarised for information purposes. If you require legal advice on the potential impact, please let us know.

A New Framework For Transferring Personal Data From the EU to the US

My piece for Ogier Leman on this is available here.

From 1 January 2021, any EEA-based organisation wishing to transfer personal data from the EEA to any non-EEA country will need to be able to show that the processing will receive the same protection as under EU's General Data Protection Regulation (GDPR). Many firms might consider this to be impracticable from a cost and administration standpoint, particularly in light of certain new recommendations on which the EU data protection authorities are now consulting. These are briefly explained below. This will affect "thousands" of firms and could prove severely disruptive for cross-border services ranging from payroll and benefits, to e-commerce marketplaces to social media services. If you need assistance in Ireland/EEA please let us know.

Options for transferring personal data from the EEA  

An EEA-based business can only transfer personal data to a non-EEA country, if one of three situations apply: 

1. the European Commission has ruled that country's personal data protection laws to be ‘adequate’;
2. there are appropriate safeguards or 'transfer tools' in place to protect the rights of data subjects (including 'Standard Contractual Clauses'); or
3. certain 'derogations' or exemptions apply to allow the processing as of right.  

No adequacy decision for the UK in the near term

Like the US, the UK as a key example of a non-EEA country without an adequacy finding. For many reasons it is best to assume there will not be an EU adequacy decision relating to the UK’s data protection regime by 1 January 2021, as that process is long and complex, and there are some features of the UK regime which present significant problems, including: 

• the UK’s use of mass surveillance techniques;
• intelligence sharing with other countries such as the US;
• the questionable validity of the UK immigration control exemption;
• the lack of a ‘fundamental right’ to data protection under UK law; 
• UK adequacy findings for other countries’ personal data regimes that the EU does not deem adequate; and 
• the potential for future divergence from EU data protection standards if the UK GDPR is further modified post Brexit. 

The Problem with Standard Contractual Clauses

As a result of the decision of the European Court of Justice in the case against Facebook (‘Schrems II’), a data exporter relying on Standard Contractual Clauses (or other contractual 'transfer tools') must first verify that the law of the third country ensures a level of protection for personal data that is equivalent to GDPR. If that level is considered sub-standard, the data exporter may be able to use certain measures to plug the gaps, but this process would need to be carefully documented and is the subject of the main recommendations from the European data protection authorities, discussed below.  

The extent to which you can usefully rely on the derogations, either before considering the other appropriate safeguards or 'transfer tools', or if those other options are not available, is also somewhat doubtful, as I will explain.

Assessing whether personal data transfers outside the EEA are appropriate 

To help data exporters evaluate whether the use of transfer tools will be appropriate, the forum of all the EEA data protection authorities (the European Data Protection Board or 'EDPB'), is now consulting on recommendations for: 

• measures that supplement transfer tools to ensure compliance with the EU level of protection of personal data; and
• certain European Essential Guarantees for evaluating surveillance measures. 

The EDPB's first set of recommendations contain steps outlined below. The European Essential Guarantees enable data exporters to determine if the rights for public authorities to access personal data for surveillance purposes can be regarded as a justifiable interference with the rights to privacy and the protection of personal data. Basically:

A. Processing should be based on clear, precise and accessible rules;

B. Necessity and proportionality with regard to the legitimate objectives pursued need to  be demonstrated;

C. An independent oversight mechanism should exist;

D. Effective remedies need to be available to the individual.

The steps involved in assessing the appropriateness of transfer tools must be documented. These involve:

• mapping the proposed transfers;
• choosing the basis for transfer (adequacy decision, 'transfer tool' or derogation);
• unless an adequacy decision has been made by the EU, working with the data importer to assess whether the law or practice of the third country may impinge on  the  effectiveness  of  the  appropriate  safeguards  of the  transfer tools you are relying  on,  in  the context  of  your  specific  transfer (legislation, especially where ambiguous or not  publicly  available; and/or certain reputable third party findings such as those in Annex 3),  and not rely  on  subjective factors such as the perceived likelihood of public authorities’ access to your data in a manner not in line with EU standards;
• considering whether any supplementary tools might avoid any problems with the third country's laws (various use-cases and suggested tools are explained in the Annex 2 to the recommendations);
• taking any formal steps to implement the relevant tool;
• re-evaluate the assessment periodically or on certain triggers, such as changes in the law (which you should also oblige the data importer to keep you informed about).

Data exporters must thoroughly record their assessment process in the context of the transfer, the third country law and the transfer tool on which they propose to rely. But it may not be possible to implement sufficient supplementary measures in every case, meaning the transfer must not proceed. As the Commission points out, there are "no quick fixes, nor a one-size-fits-all solution for all transfers." 

 

The problem with relying on 'derogations' 

The EDPB's first set of recommendations state (at para 27) that "If your transfer can neither be legally based on an adequacy decision, nor on an Article 49 derogation, you need to continue with... ” assessing whether the proposed transfer tool is effective. However, that order of approach is not consistent with Article 49, which provides that:

1. In the absence of an adequacy decision pursuant to Article 45(3), or of appropriate safeguards pursuant to Article 46, including binding corporate rules, a transfer or a set of transfers of personal data to a third country or an international organisation shall take place only on one of the following conditions:

 

(a) the data subject has explicitly consented to the proposed transfer, after having been informed of the possible risks of such transfers for the data subject due to the absence of an adequacy decision and appropriate safeguards;

(b) the transfer is necessary for the performance of a contract between the data subject and the controller or the implementation of pre-contractual measures taken at the data subject's request; 

(c) the transfer is necessary for the conclusion or performance of a contract concluded in the interest of the data subject between the controller and another natural or legal person;

...

Where a transfer could not be based on a provision in Article 45 or 46, including the provisions on binding corporate rules, and none of the derogations for a specific situation referred to in the first subparagraph of this paragraph is applicable, a transfer to a third country or an international organisation may take place only if the transfer is not repetitive, concerns only a limited number of data subjects, is necessary for the purposes of compelling legitimate interests pursued by the controller which are not overridden by the interests or rights and freedoms of the data subject, and the controller has assessed all the circumstances surrounding the data transfer and has on the basis of that assessment provided suitable safeguards with regard to the protection of personal data. The controller shall inform the supervisory authority of the transfer. The controller shall, in addition to providing the information referred to in Articles 13 and 14, inform the data subject of the transfer and on the compelling legitimate interests pursued. 

 

In addition, the EDPB's own guidance on article 49 itself points out (on pages 3-4) that: 

“Article 44 requires all provisions in Chapter V to be applied in such a way as to ensure that the level of protection of natural persons guaranteed by the GDPR is not undermined. This also implies that recourse to the derogations of Article 49 should never lead to a situation where fundamental rights might be breached…Hence, data exporters should first endeavor possibilities to frame the transfer with one of the mechanisms included in Articles 45 [adequacy] and 46 [transfer tools] GDPR, and only in their absence use the derogations provided in Article 49 (1)” [but even then the use of the derogations would imply the need for an assessment of the third country’s personal data protection regime by virtue of article 44].

[explore?]

Accordingly, there seems to be no alternative to running through the steps to assess whether the relevant 'transfer tools' will work (with or without supplementary measures) in the context of the transfer and the third country's law. Yet, as we've seen, many firms will likely find that process impracticable from a cost and administration standpoint, so transferring the personal data out of the EEA will not be an option.

 

Digital Objects: A New Class of Personal Property in English Law

Following the Law Commission consultation paper published in August 2022, which I later summarised for the SCL, the Commission has now published its report on the consultation process and a related summary. I'm yet to dig into the report fully, but here's a quick run-down on the summary. Professor Sarah Green and her team are to be commended on their consultation paper, the manner in which they conducted the consultation process and the report itself. Theirs is a colossal and momentous achievement that will no doubt form the basis of considerable legal evolution in the years to come.

The Commission has found that English law has recognised "certain digital assets as things to which personal property rights can relate" as a distinct legal category, but that certain complex areas of legal uncertainty remain that law reform could reduce. For instance, there are "difficult boundary issues" in distinguishing between digital 'assets' such as crypto-tokens; private, permissioned blockchain systems; voluntary carbon credits; in-game digital assets; and digital files. These assets may be based on very different technologies and whether they can or should attract personal property rights may depend on particular sets of facts.

Overall, the Commission recommends that this uncertainty would be best met through the evolution of case law and some targeted legislation, with support from a panel of industry-specific technical experts, legal practitioners, academics and judges.

More specifically (but by no means exhaustively), the Commission concludes that, under the law of England & Wales ("English law"): 

1. a 'thing' should not be deprived of legal status as an object of personal property rights merely because it is neither 'a thing in action' nor 'a thing in possession' (the main traditional forms of personal property);
2. personal property rights should relate to a thing that is rivalrous (i.e. where the use or consumption of the thing by one person (or specific group) necessarily prejudices the use or consumption of that thing by others);
3. factual control (plus intention) can found a legal proprietary interest in a digital object, and in certain circumstances such an interest can be separate from (but less than) a superior legal title;
4. it is possible (with the requisite intention) to effect a legal transfer of a crypto-token either off-chain (by a change of control) or on-chain (by a transfer operation that effects a state change);
5. a special defence of 'good faith purchaser for value without notice' can be recognised and developed in common law (i.e. via the courts) in relation to crypto-tokens and other 'third category things';
6. crypto-token intermediated holding arrangements can be characterised and structured as trusts, with rights of co-ownership by way of an 'equitable tenancy in common' (rather than necessarily joint and several interests);
7. recognising a control-based legal proprietary interest could provide the basis for an alternative legal structure for custodial intermediated holding arrangements in addition to trusts, whereby certain holding intermediaries acquire a control-based proprietary interest in crypto-token entitlements that is subject to superior legal title retained by users;
8. the courts could develop principles of tortious liability for wrongful interference with 'third category things' by analogy with the tort of conversion;
9. The Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs) should be amended to confirm and clarify their applicability to crypto-tokens, cryptoassets (including central bank digital currencies (CBDCs) and fiat currency-linked stablecoins) and/ or mere record/register tokens, including where a financial instrument or a credit claim is tokenised and effectively linked or stapled to a crypto-token; 
10. UK company law should be reviewed to assess the merits of reforms to confirm the validity and/or use of crypto-token networks for the issuance/transfer of equities and other registered corporate securities, including the extent to which applicable laws might support the use of public permissionless ledgers for such purposes; and
11. the UK government should establish a multi-disciplinary project to create a bespoke statutory legal framework to facilitate the certain crypto-token and cryptoasset collateral arrangements.

Again, the consultation and report represent a colossal and momentous achievement by the Professor Sarah Green and her team, who should be commended for their efforts. I'm sure their work will form the basis of a great deal of legal evolution in the coming years.

The Payments Industry Required To Cover 'Push Payment' Scams

The UK’s Payment Systems Regulator (PSR) has announced it will impose a new reimbursement requirement for ‘authorised push payment fraud’ (APP fraud) involving the Faster Payments system from 2024, with a further review in 2026. APP fraud occurs where a fraudster tricks someone into sending a payment to a payment account controlled by the fraudster (or a ‘mule’). I've summarised the requirements below for information purposes, but if you need advice on the scope or application of the new requirements, please let me know.

What is APP fraud?

APP fraud involves payments where the victim is deceived into allowing or authorising a payment from their account with a bank or other payment service provider (PSP), including where they intend to transfer the funds to someone else but are deceived into transferring the funds to the fraudster instead (or the fraudster's associate or ‘mule’), or where the victim is deceived as to the purpose of transferring the funds to the account outside their control. 

Examples of APP fraud involve impersonation, investment, romance, purchase, invoice and mandate, CEO fraud and advance fees.

How much APP fraud is there?

According to UK Finance, there were approximately 207,000 reported cases on personal accounts in 2022 (up 6%) worth £485m, but “many cases” go unreported. Most (97%) involve the Faster Payment system (though APP fraud payments make up only 0.1% of all Faster Payments. 

Mandatory reimbursement will be on top of the voluntary Contingent Reimbursement Model (CRM) Code launched in 2019, which covered 66% of APP fraud losses within its scope in 2022; and some other initiatives by individual firms. 

What about other payment methods?

The Bank of England is also committed to achieving similar reimbursement for consumers making larger 'CHAPS' transactions. 

The PSR will also consider whether the new reimbursement requirement should apply to other payment systems in due course, but it will apply to the New Payments Architecture (NPA) that will replace existing inter-bank payment systems by 1 July 2026. 

Which customers are covered?

The new reimbursement requirement applies to consumers, microenterprises and small charities (which are all treated as ‘consumers’ under the Payment Services Regulations and is the same coverage as the CRM Code). 

The sending PSP processing an APP fraud claim should assess the customer’s situation and any potential vulnerability in line with the FCA’s guidance for PSPs on the fair treatment of vulnerable customers. 

A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. 

If a customer is deemed vulnerable for a specific APP fraud, the sending PSP must not apply the customer standard of caution (gross negligence) or claim excess. 

Which firms are liable for a reimbursement?

The new requirement will mean payment firms must reimburse all in-scope customers who fall victim to APP fraud, sharing the cost of reimbursing victims 50:50 between sending and receiving payment firms, with extra protections for vulnerable customers. PSPs must reimburse customers within 5 business days. There will also be a deadline for firms reimbursing each other, where one pays the customer first. 

The regulator will consult later this year on a potential maximum limits for reimbursements, and claims must be made within 13 months after the final payment to the fraudster. 

Only the PSP that operates the sending payment account and the PSP that operates the receiving payment account for a qualifying transaction are both required to provide reimbursements. This means that a ‘payment initiation service provider’ will not need to provide reimbursements unless it is also acting as the receiving PSP. 

Which payments are covered?

Only payments made using Faster Payments where the victim is deceived into allowing or authorising a payment from their account with a PSP to another account outside the victim's control at another PSP.

Where fraudster persuades the victim to go through several steps - first transferring their money from the sending account at one PSP to another account that the victim has at a different PSP, before then transferring the funds to an account outside the victim’s control at another PSP (‘multi-step APP fraud’), the reimbursement requirement only applies to the Faster Payment made from the victim's last sending account to the receiving account outside the victim’s control.

Which payments are not covered?

The reimbursement requirement does not apply to: 

• civil disputes, such as those relating to the quality of goods/services which are mainly covered by consumer rights legislation; 
• payments which take place across other payment systems; 
• international payments; or 
• payments made for unlawful purposes.  

There will also be no reimbursement where the customer has acted fraudulently (‘first-party fraud’) or with gross negligence, which the PSP must prove. 

The PSR has no regulatory power to require reimbursements for ‘on us’ payments, where the fraudster uses a receiving account with the same PSP where the victim holds the sending account. However, the regulator is seeking to persuade the FCA that this must be the case. The PSR also suggests the same result should apply for users of Bacs and payment cards. 

How will the PSR enforce the requirements?

The Regulator will direct Pay.UK to put the new reimbursement requirement into Faster Payments rules and give a general direction to create a regulatory obligation on in-scope PSPs to comply with the requirement in the Faster Payments rules. The regulator will also issue guidance on what constitutes ‘gross negligence’ by customers. 

This post does not constitute legal advice. If you need advice on the scope or application of the new requirements, please let me know.

UK Authorities To Slam Stable Door On Crypto Promotions In October.

You may have noticed that the UK government has been somewhat distracted (since, oh, 2016), but the FCA has finally received the legislative support to publish its near-final financial promotion rules for cryptoassets and related guidance. These follow final rules for other high-risk investments(i.e. excluding cryptoassets) published in August 2022. The new rules classify currently unregulated cryptoassets as ‘Restricted Mass Market Investments’ and restrict how they can be marketed to UK consumers. The rules take effect from 8 October 2023, with a 4 month transition period thereafter (any comments on the related Guidance should be submitted by 10 August). The FCA promises "robust" enforcement action against firms in breach, such as take down requests, adding firms to the FCA's warning list of unauthorised firms and criminal prosecutions that could result in an unlimited fine and/or 2 years in jail... 

The rules apply to ‘qualifying cryptoassets’ - basically cryptographically secured digital representations of value or contractual rights that are transferable and fungible, but does not include cryptoassets that are regulated as electronic money or an existing 'controlled investment' for financial promotions purposes (since the promotion of those is already regulated).

This means that 'invitations' or 'inducements' to engage in the following activities in relation to the newly qualifying cryptoassets will be caught by the rules: 

• dealing 

• arranging deals 

• managing 

• advising 

• agreeing to carry on specified kinds of activity in relation to these qualifying cryptoassets.

However, cryptoasset exchanges and custodian wallet providers who are registered with the FCA under money laundering regulations and not otherwise authorised firms will be able to communicate their own cryptoasset financial promotions to UK consumers; while firms that are only authorised under the Electronic Money Regulations, or the Payment Services Regulations will not be able to communicate or approve cryptoasset financial promotions at all under the law as it stands.

The result is that there will only be 4 routes for legally promoting cryptoassets to UK consumers: 

• by an authorised person; 

• by an unauthorised person with the approval of an authorised person (a process that will get tougher when authorised firms have to pass through a new regulatory 'gateway' before they can approve financial promotions for unauthorised persons);

• by a cryptoasset business registered with the FCA for money laundering purposes;

• under a specific exemption (but exemptions for 'high net worth' or 'self-certified sophisticated' investors or for the sale of goods or supply of services are not available). 

This post only summarises some of the rules and does not constitute legal advice. If you need assistance with any of this, please let me know.