Reform of UK Consumer Credit Law - Phase 1

Just a short post to confirm that the UK government is consulting on its proposed approach to the long overdue reform of the deeply confusing consumer credit regime. This will be done in several phases. And consultation on the first phase ends on 21 July.

Broadly, as with other areas of financial regulation, the government basically proposes to repeal the Consumer Credit Act 1974 and Regulations, bar a few provisions that I guess it could fold into, say, the Financial Services and Markets Act/Orders and FCA Rules.

Phase 1 will focus on removing 'information requirements' and the draconian sanctions or consequences for mistakes, in favour of FCA disclosure rules and supervision.

Phase 2 will look at supplier/creditor liability and unfairness provisions, the different types of credit/hire agreements and other key definitions. 

While the government is looking for feedback on the approach, frankly, the whole thing is going to be so hideously complex we may as well just get on with it as proposed. At some point, the new regime will have to factor in the multitude of court decisions, interpretation and unofficial guidance that has grown up over the decades: this will need to be captured in the FCA Handbook (a combination of rules and guidance, anyway); and/or the original language transplanted so as not to create fresh grounds for 'clarifying' litigation.

At any rate, it will be fascinating to see whether the outcome is just as complex as before, albeit everything is in the one set of legislation, orders and rules. That's my bet. It surely can't get much worse... can it?

UK Government Follows Through On BNPL Regulation

The 'new' UK government has followed through with earlier plans to regulate 'Buy Now Pay Later' (BNPL) short term installment credit that had stalled under the previous government. The regulated version will be called 'deferred payment credit' (DPC). The regulations won't bite until mid-2026, but it's good to finally have certainty as to what is regulated (if not the fine detail yet). And merchants, fintech service providers and credit reference agencies can use the 12 month window to figure out ways for consumers to keep track of both their regulated DPC and unregulated BNPL instalment credit. I've already summarised the latest proposals for Keystone here for information purposes, and have added a few thoughts below to consider. If you need advice on the plans, please let me know. 

Given that BNPL agreements directly with a merchant will remain unregulated, there remains an opportunity for third party finance providers (whether FCA-authorised or not) to work with merchants on unregulated BNPL. Structuring the overall offering to remain unregulated will take care, however.

The proliferation of DPC/BNPL arrangements should prove a boon to 'open banking' or 'account information service' providers who can offer consumers visibility of all their obligations, whether directly or via device manufacturers, DPC lenders or even merchants themselves.

There's also a growing credit reference/assessment challenge as more consumers take on more instalment credit, whether regulated or not.

The government is right, in my view, to keep a weather eye on the unregulated BNPL market to see if intervention is required, before acting. Third party lenders who complain about an uneven playing field between should also consider that regulating merchant BNPL could hurt smaller merchants in favour of larger merchants who already possibly have the resources to offer better instalment options, let alone bear the burden of being FCA authorised (not to mention the strain on the FCA itself in taking on every merchant that wishes to offer BNPL/DPC!).

 

FCA Discussion Paper On New Crypto Rules

Hard on the heels of the Treasury's proposed regulatory framework for cryptoasset activities in the UK, the Financial Conduct Authority published its own discussion paper on how it will supervise these activities within that framework. The FCA has requested feedback by 13 June 2025.

The FCA's proposals are far reaching (including extra-territorial) and complex. Some areas are new, while others aspects attempt to include cryptoassets/activity into existing rulebooks. There are also some proposed restrictions on the type of customers that firms can deal with. 

The actual rules and guidance won't be available until mid-2025, when the FCA will publish a Consultation Paper on issuing a qualifying stablecoin, safeguarding qualifying cryptoassets and specified investment cryptoassets, along with the prudential framework (capital requirements) for qualifying stablecoins and safeguarding. There will be a further consultation on the wider 'conduct' standards, such as the Consumer Duty even later in 2025.

I will add my thoughts on the discussion paper below, for information purposes. If you require legal advice on the plans and their impact, please let me know. 

Operating a Qualifying Cryptoasset Trading Platform

This proposed new regulated activity is incredibly broad: 

[the operation of] ‘a system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in qualifying cryptoassets in a way that results in a contract for the exchange of qualifying cryptoassets for any of: (a) money (including electronic money); or (b) other qualifying cryptoassets.

Any entity operating a trading platform for cryptoassets in the UK, or providing services to UK clients, will generally need to be authorised in the UK, except a firm operating an offshore trading platform for cryptoassets that is only serving professional investors in the UK.

One approach to authorisation for offshore firms would be to require both a 'branch' or local establishment for operating the platform and interfacing with overseas customers; and a UK subsidiary for client-facing functions (including for retail customers). Where an offshore firm is also regulated in its home jurisdiction, the FCA might be prepared to leave certain issues (e.g. capital requirements and systems/controls for trading operations) to the home regulator.

When dealing with retail customers, the FCA proposes that CATPs should:

• Disclose and clarify their own and their clients’ respective responsibilities. 
• Ensure that customers comply with the platform rules and relevant regulations (for example, not engaging in market manipulation). 
• Monitor trading activity to identify infringements of rules. 
• Set controls and limits for each type of customer profile. 
• Be able to revoke access or participation rights, or to suspend a customer.

Algorithmic trading and automated trading software: the FCA points out these are "highly prevalent in cryptoasset markets, with popular bot providers reporting up to 1 million users", including retail investors, requiring limited, if any, human intervention. "Trading platforms also provide dedicated access capabilities for algorithmic trading or [high frequency trading] HFT." Whether or not these will need to be authorised or registered somehow, CATPs will have to ensure fair and non-discriminatory access to trading, ensure orderly markets and eliminate or manage/disclose conflicts of interests between providers of algorithmic or automated trading software and the CATP operator.

Market-makers: the FCA is aware of anti-competitive and collusive practices between crypto trading platforms and market makers, artificially inflating trading volumes, giving unfair advantages for affiliated market makers, and market manipulation. Therefore, CATPs may need to identify those operating market making strategies on the trading platform; have appropriate contracts in place; and disclose potential relationships. Contracts would govern the market making scheme and including obligations for market makers posting simultaneous two-way quotes for a specific liquidity pool.

Trading & execution: Crypto trading service providers have different matching and execution protocols. Some exchanges combine discretionary and non-discretionary systems, and some trade in principal capacity on and off platform with their clients in ways that aren't clear who the counterparty is. The FCA will require CATPs to operate on a non-discretionary basis, treating all orders identically, according to a consistent set of rules, rather than using their judgement as to whether, when and how much of any orders to match. Where investors participate directly, CATPs might not be required to "take all sufficient steps to obtain the best possible order execution results for clients" (best execution requirements), so it would be up to investors to consider where best to trade on the basis of prices, fees and costs. Investors using an intermediary may benefit form investor protection rules and the intermediary's obligation to act in the investor’s best interest, including seeking best execution, though commission or other compensation would be charged.

Matched Principal Trading: this is a form of trading where a person acts as a broker or central counterparty between the buyer and seller, making sure that the price and quantity is agreed on both sides before the trade is executed. The broker charges a fee rather than making a turn on the difference/spread between the buy and sell prices. The risks are that the CATP as broker trades against the clients on platform and/or takes on market risk (of counterparty default). which could create resiliency risks; conflicts of interest undermine the fair and non-discretionary operation of markets; and there may be other abusive or anti-competitive practices, such as wash trading and market manipulation. As a result, the FCA is not happy that "Exchanges often execute clients’ transactions back-to-back, by standing between the 2 trading counterparties" and want to explore some alternatives in light of the IOSCO Recommendations: neither the CATP operator nor any of its affiliates should never be allowed to trade in principal capacity on the CATP's own platform; and the CATP should not be allowed to do so even off platform, for trading activity not related to their CATP’s operation.

Issuing: the FCA may require legal or functional separation between the firm operating a CATP and the issuer of the cryptoassets admitted to trading on the CATP. Legal separation in particular could avoid credit and market risks exposures, capital risks, conflicts of interests and anti-competitive practices by the CATP against other issuers.

Market & Counterparty Credit Risks: the FCA wants CATPs to be "risk-neutral trading systems", without counterparty or credit risk to clients or products. CATPs could not act as a clearing house or directly manage or internalise risk exposures between counterparties on their platform; or provide credit lines or make credit arrangements with their clients.

Settlement: is the ‘irrevocable and unconditional transfer of an asset […], or the discharge of an obligation […] in accordance with the terms of the underlying contract’. The challenge with regulating settlement in cryptoasset markets is that CATPs don't control the underlying distributed ledger or 'blockchain' protocols (which the UK does not intend to regulate). CATPs often take on settlement responsibilities internally, creating risks for the CATP or its clients if a counterparty defaults in its own obligations. Generally, the FCA expects CATPs to have "satisfactory arrangements" for securing the timely and effective transfer of control over the cryptoassets traded on their platform, whether internally or by facilitating or arranging this through other service providers (including custodians).

Transparency & Reporting: the FCA has found that "cryptoasset market data is often unreliable and inconsistent", which undermines efficient pricing, creates unlevel playing fields, and creates "incentives in favour of minor, or illiquid, trading desks that do not offer the same level of transparency". In other words, this is how the pro's fleece the retail sheep. Therefore, the FCA wants to rely on CATPs to clean up and publish pre- and post-trade market data (presumably so a cryptoasset market data sector will grow up, just as other markets for financial data have evolved), including order and transaction data (while also retaining client identity information internally for 5 years).

Cryptoasset Intermediaries

These intermediary functions involve dealing as principal or agent; or arranging such deals in qualifying cryptoassets. Many CATPs undertake these functions as well as being an 'exchange'. Only 28% of users bought crypto through a distinct intermediary, paying higher charges and taking on a long list of risks (that also apply where the CATP is also acting as an intermediary, with additional conflicts of interest and opportunities for abuse). Chapter 3 of the Discussion Paper has more detail on the proposals to address these issues on a 'same risk, same regulatory outcome' basis as in traditional markets: 

• Facilitate UK investors’ access to global crypto markets through authorised entities. 
• Make sure UK markets remain internationally competitive, fair, orderly, transparent and liquid. 
• Fair and transparent conditions for trades executed for, or on behalf of, a client; executed in a way that serves the best interest of clients. 
• Intermediaries ensure that the price a customer pays for a product is transparent and reasonable compared to the overall benefits the customer gets from the product. 
• Firms compete to provide best execution. 
• Consumers protected from unfair or abusive practices. 
• Intermediaries manage conflicts of interest effectively. 
• Support growth of the UK intermediary market with clear and proportionate regulation.