Recent FCA speeches reveal future strategy for regulation of fintech and digital assets // Cooley // Global Law Firm
Two recent speeches by the UK’s financial regulator, the Financial Conduct Authority (FCA), shed light on how the FCA wants to be perceived when it comes to regulating fintech and digital asset markets. In this notice, we summarize the most important talking points and elaborate on what this means for the FCA’s future strategy. While the speeches emphasize that the FCA’s primary concern is to protect consumers from potential harm, they also highlight how the FCA is committed to driving innovation in these markets and helping the UK remain an attractive destination for financial technology investment.
Fintech regulation: FCA as innovator and incubator
In a speech given to TheCityUK, a private sector membership body promoting the UK’s financial and related professional services industry, on 26 April 2023 by Emily Shepperd, the FCA’s chief executive and chief executive of authorisations, the underlying message was that the FCA wants to be seen as ‘here to help’. Asked what regulators can do to make it easier for fintech firms to thrive, Shepperd noted that the temptation may be to “rip up all the rules… [y]one of the best things a regulator can do to help innovators is to lay a solid foundation on which the business can grow. She described regulatory compliance as an essential ingredient for growth, noting that as fintech firms grow, they often find themselves moving toward more regulatory scrutiny and eventually, for example, applying for a banking license. Shepperd also noted that market integrity is protected through the FCA’s authorization gateway. Last year the FCA rejected more firms than ever for failing to meet the high standards required. Such high standards “provide the solid foundation upon which innovators can innovate and investors can invest – with confidence”.
Perhaps the most interesting remark from Shepperd was her assertion that the FCA is as much an innovator and incubator as a regulator. She noted that while the perception may be that the FCA are “the funny extinguishers of financial services, always saying ‘no’ … behind the scenes, we say ‘yes’ or at least ‘maybe’. Or more often, ‘try again “‘. This indicates a conciliatory approach which should encourage firms to engage in constructive dialogue with the FCA when their applications are rejected.
FCA’s Regulatory Sandbox
Shepperd was keen to highlight the FCA’s sandboxes – particularly their Regulatory Sandbox, where firms can test new ideas in a controlled environment and gain access to regulatory expertise and a set of tools to facilitate testing. Also mentioned was the FCA’s Innovation Pathways, which help businesses launch innovative products and services by helping them understand how regulation relates to their activities. To date, more than 830 firms have received support through the Regulatory Sandbox and Innovation Pathways services.
Early and high growth supervisory scheme and CryptoSprints
The next step for newly authorized firms could be the FCA’s Early and High Growth Supervision Scheme, which works with firms immediately after authorization to help them move from concept to reality, providing enhanced supervision for firms as they become accustomed to their regulatory status. Shepperd noted that the FCA’s public commitment to extend the scheme to 300 firms has now been met. Firms do not need to apply to join this scheme – the FCA will contact them directly if they are included.
Finally, on crypto and emerging technologies, Shepperd drew attention to the FCA’s CryptoSprint events, which aim to increase the FCA’s understanding of emerging market practices for crypto assets and seek views on an appropriate regulatory regime. A notable focus has seen the FCA helping crypto companies make their fund flows more transparent and compliant with anti-money laundering legislation. The Treasury-led Financial Market Infrastructure, or FMI sandbox, is described as a rapidly developing project that will test whether and how legislation needs to change to adapt to innovations, such as distributed ledger technology and tokenisation.
The speech ended with a reminder that the FCA’s first aims are to protect consumers from harm, maintain market integrity and promote competition. However, a new secondary objective is introduced and integrated into the organization: to promote growth among the competitiveness. This is the ultimate goal of the above sandboxes, tracks, sprints and initiatives, with FCA described as “one cog in a larger wheel that tries to drive innovation forward”.
Crypto risks and areas of future regulatory focus
In another speech delivered to TheCityUK on 25 April 2023, the FCA’s Sarah Pritchard, Managing Director of Markets and Managing Director of International, acknowledged how investing in crypto has become mainstream and considered the challenges this poses for the regulator. She noted that by 2022, 42% of US institutional investors and 67% of European institutional investors held crypto. Additionally, one in ten individual consumers have owned crypto at some point. This growth in popularity has led to an increase in cryptocurrency crime, which reached an all-time high last year, with illegal addresses receiving $20.6 billion in 2022, up from $18 billion in 2020. The number of reports to the FCA of crypto-asset fraud went from 1,619 in 2019 to 6,372 in 2021.
Pritchard emphasized how the FCA’s current mandate over crypto is limited to applying anti-money laundering and counter-terrorism crypto legislation, but this could be expanded in the future.
The UK’s anti-money laundering regulations require UK-based cryptoasset exchanges and managers to apply for registration with the FCA – and the FCA rejects nearly three-quarters of all applications. However, Pritchard noted that the FCA is committed to supporting firms in meeting the right standards, having registered 41 crypto firms of all sizes.
Crypto and financial promotions
In terms of future areas of focus, the most tangible change will soon be in the regulation of crypto-financial promotions, which will fall under the FCA’s mandate once the relevant legislation is passed. Pritchard expects that crypto campaigns will be treated on par with other high-risk investments, and failure to comply will be a criminal offence. Like other high-risk investments, consumers will be given a cooling-off period to decide whether to invest. The new regulations will apply to all firms marketing crypto-assets to UK consumers, regardless of whether the firm is based abroad or what technology is used to do the promotion. Sanctions will vary from taking down websites to issuing public warnings to enforcement action. Finally, the government’s consultation on giving the FCA new powers over those who carry out crypto-related activities that do not originate in the UK but offer services to UK consumers is described as “uncharted territory and an area we will all explore together with interest” ‘.
For further details, see our March 2023 Client Alert on Marketing Crypto Assets.
Summary: A shift in public perception?
While both speeches argue that the FCA’s primary role is to protect consumers from harm, Shepperd’s speech in particular signifies an acknowledgment by the FCA that it has an important role to play in driving innovation. Rather than being seen as the enemy of fintech firms, the sandboxes, schemes and sprints demonstrate that they are trying to seek industry input and better understand the technologies – rather than refusing to authorize firms outright. It wants to be seen as a transparent regulator that will no longer hold the UK back, but will instead cement the UK’s position as a leading fintech jurisdiction, acting as an innovator and incubator as much as a regulator. At the same time, the FCA is alive to the growth in popularity of crypto-investments and the new risks it poses to consumers, which the organization will soon have new powers to combat.
If you have any questions regarding fintech and digital asset regulation, or financial regulation in general, please contact Cooley’s Special Counsel Yulia Makarova.
