Fintech and crypto regulation to watch for in 2023

The UK’s approach to fintech and crypto regulation has been to strike a balance between supporting innovation and ensuring a secure financial system. But a seemingly endless series of fronts has opened up. What comes next?

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There is no doubt that in 2023 the fintech industry is looking for regulatory clarity after a year of rapid change over the past twelve months.

After a decade of ever-expanding scale, fintech faced the prospect of a lifetime of declining venture capital backing as an era of “cheap” money came to an end.

This prompted many fintech companies to bring forward a path to profitability and coincided with a number of new regulatory fronts, particularly here in the UK from crypto, BNPL and open banking.

Yes, fintech adoption continues to revolutionize the way we handle money, but the government has needed to be more and more focused on trying to keep up with the pace of change. Repeated changes in government have not helped. Can Britain catch up in 2023?

A balancing act

Financial regulation in the UK has for a number of years been aimed at ensuring consumer protection, promoting innovation and maintaining stability in the financial sector.

The regulatory framework is overseen by the Financial Conduct Authority (FCA), which established its Sandbox program to support fintech startups and encourage experimentation in a controlled environment nearly a decade ago.

The FCA has also issued specific guidelines for various fintech products and services, including peer-to-peer lending, crowdfunding and payment services which have been key drivers of change, particularly the former which started a spiral of change from 2019 onwards with platforms largely going away from private financing.

The UK government has also implemented anti-money laundering and anti-terrorist financing measures for cryptocurrency exchanges operating in the country recently.

In addition, the Bank of England’s favorite focus is establishing a regulatory framework for central bank digital currencies and overseeing the development of stablecoins.

With new technologies and financial products emerging every day, it can be challenging to keep up with the latest changes. But fear not! In this article, we delve into the complex world of regulation and examine how the UK balances innovation with consumer protection and stability in the financial sector.

“The Edinburgh Reforms”

The British government is set to adopt a major overhaul of the entire existing banking regulations in the country.

These new regulations, dubbed the “Edinburgh reforms” and announced by Chancellor Jeremy Hunt in December, will “turbocharge growth” for the country.

He describes the package as the biggest overhaul of banking rules in 30 years. The reforms are based on the government’s reform agenda, which is taken forward through the bill on financial services and markets (FSM).

The reforms are aimed at building on the strength of the UK’s financial sector, and taking advantage – Hunt claims – of the opportunities the country’s exit from the EU provides to tailor regulations to suit the country’s needs.

The government has set up a collection of 30 regulatory reforms for financial services and a number of EU regulations are under review, repealed and replaced.

One of the main changes proposed is the demarcation rules, which currently require large banks to separate their retail and investment arms, even if they don’t have an investment arm.

The government wants to cut red tape and increase banking competition by exempting retail-focused banks from these rules, while maintaining protections for consumers. This could significantly reshape the competitive landscape, especially for neobanks.

“The Edinburgh reforms set out the Chancellor’s strategy for the immediate future and it is a packed agenda. It will be crucial that ambitious but complex projects such as reforming the Consumer Credit Act and the Payment Services Regulation, both of which are under review as we speak, do not distract from a bouquet of loose ends,” Charlie Mercer, head of economic policy at Coadec said.

“While clarity on what’s next in open banking and crypto is badly needed, we’re also long overdue for an update on BNPL, which remains unregulated two years after the Woolard Review. It’s right to be ambitious, but the reality is that fintechs will not be able to properly engage in long-term change while short-term uncertainty persists,” Mercer added.

Lending

While new laws on lending, especially in the fast-moving world of “buy now, pay later” may not come this year, reforming the Consumer Credit Act via a consultation is likely to bring the biggest shake-up in consumer credit in generations, according to Myron Jobson, senior personal financial analyst at Interactive Investor.

It turned out that the law from 1974 did not have much in the way of publicity around BNPL.

Just before Christmas 2022, the government published a consultation on how the modernization of consumer credit legislation should proceed.

– Attitudes towards credit have changed since the law was introduced half a century ago. The growth in digital lending is due to changes in consumer behaviour. Security measures will likely be updated to account for this trend, Jobson said.

“It is also important that the language around credit is made clearer. The reason many borrowers get into trouble is because they do not fully understand the consequences of what they are taking on,” Jobson added.

Buy now pay later schemes are an example, he says.

“Ads promoting BNPL schemes can be as clear as mud and the concern is that a growing number of people are using such schemes without a clear understanding of the key considerations, a slippery slope to serious debt.”

“The need for an updated and robust set of rules governing the credit market has never been more important amid the cost of living crisis.”

Crypto

While still much smaller than the mainstream financial system, crypto is high on the agenda of the UK government due to the breakneck speed of its growth in recent years combined with the seemingly endless string of scandals and scams coming out of the sector.

Crypto exchange Luno’s global head of public policy Thomas Tudehope wrote in an article for AltFi in November that a “seriously significant step” in cryptocurrency regulation has already taken shape via an amendment tabled by Andrew Griffith MP and HM Treasury to the Financial Services and Markets Act.

That would likely see the UK introduce a full “comprehensive regulatory regime” for crypto by 2023, Tudehope says.