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Top financial services enforcement trends: fintech and cryptoassets

In its most recent Business Plan for 2021/22, the UK Financial Conduct Authority (FCA) confirmed that delivering fair value for consumers in the digital age remains an important priority. This is reflected in the FCA’s consumer priorities for 2022 and beyond. 

The digital markets challenge

The FCA’s desired outcome for digital markets is for consumers to be able to choose from products that meet their needs at a competitive quality and price, but also for digital innovation and competition to support greater value for consumers. At the same time, the FCA is keen that consumers fully understand the risks involved when they engage with financial services online. 

The ever-growing popularity of technology-enabled products has transformed the way in which consumers engage with financial services, but has also prompted questions as to the role that technology should play in the design and delivery of those services. For example, algorithmic methods are already used to assess creditworthiness and affordability for consumer lending products. 

The increasing sophistication and interactivity of user interfaces has also served as a catalyst for the “gamification” of financial services, an issue on which the FCA has already expressed concern. 

The key question being asked by the FCA, as well as other international regulators, is what level of regulation and what level of supervision should apply to firms delivering their services exclusively or mostly online. This includes scrutiny of the platforms that are intermediating these services. 

Regulatory scrutiny

The UK authorities have begun targeted regulatory scrutiny of particular products and services. 

For example, the Woolard Review into change and innovation in the unsecured credit market recommended that the “buy now pay later” sector be brought within the regulatory perimeter. The FCA and the Treasury have also suggested further extending the Senior Managers and Certification Regime (SMCR) to e-money and payment firms, as well as financial markets infrastructures. 

Developing the regulatory framework for firms engaged in cryptoasset activities has been high on the FCA’s agenda. Most recently, the FCA published a consultation on strengthening the financial promotion rules for high-risk investments, including cryptoassets. The FCA plans to categorise “qualifying cryptoassets” as ‘Restricted Mass Market Investments’, meaning that firms will be able to market cryptoasset-related products or services to consumers only if they meet the definition of restricted, high net worth or certified sophisticated investors.

Enforcement action

Although there is yet to be substantial enforcement action taken in relation to fintech, it is a sector under increasing regulatory scrutiny and one in relation to which it would be reasonable to expect the FCA to flex its enforcement muscles relatively early on if it identifies a significant risk of, or actual, customer harm. 

In the meantime, the FCA appears to be focusing on tightening the authorisations gateway for fintech firms.  It approved only 4% of applications that it received from cryptoasset businesses during 2021, to register with it in its capacity as the anti-money laundering and counter-terrorist financing supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The FCA has publicly stated that a significantly high number of cryptoasset businesses are not meeting the required standards under the 2017 Regulations, which has led to an unprecedented number of businesses withdrawing their applications for registration. 

Initial enforcement action in relation to cryptoasset service providers is likely to be focused on UK firms that have failed to register with the FCA. However, it is only a matter of time until the FCA starts to scrutinise cryptoasset firms that have registered, but are found to have inadequate financial crime controls, or to have facilitated money laundering.

Our next blog in this series considers FCA enforcement trends relating to culture, governance and individual accountability. 

This post is based on an article "FCA and PRA Enforcement Action: Trends and Predictions" which first appeared in the January edition of PLC Magazine and a copy of the full article is available here and on the PLC Magazine website.