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UK Government Fintech strategy

The UK government has launched its Fintech Sector Strategy, which sets out a range of UK government and industry measures seeking to tackle the barriers to entry and growth facing Fintech firms, and identifying areas of emerging opportunity offered by UK Fintech. Key proposals include the formation of a Crypto-assets Task Force to consider the future of crypto-asset regulation in the UK and the development of “robo-regulation” to decrease the cost of, and improve, regulatory compliance.

New crypto-assets Task Force

One of the key areas of focus for the UK government, reiterated in the strategy, is on the risks associated with crypto-assets and on managing these risks effectively and engaging with the potential benefits of the underlying distributed ledger technology. Accordingly, a Crypto-assets Task Force comprising HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) will be established to “further explore risks associated with crypto-assets and the benefits of the underlying technology”, and to assess the future response of UK government and regulators to crypto-currencies and how authorities will regulate the asset class.

To date, in the UK, the prevailing view of regulators has been to treat crypto-currencies as a commodity, rather than a currency or a security. The FCA chief executive, Andrew Bailey, recently confirmed that virtual “commodities” like Bitcoin are not currently regulated by UK financial regulatory authorities and that it is up to the UK Parliament to decide on any changes to the scope of the regulatory regime. The FCA has also confirmed that, in its view, crypto-currencies, such as Bitcoin, are not “specified investments” for the purposes of the Financial Services and Markets Act (FSMA) 2000 (Regulated Activities) Order 2001.1 Therefore, the issuing of, or trading in, a crypto-currency will typically not involve a UK regulated activity, at least insofar as the currency can be characterised as a commodity or means of exchange.

There are, however, two related points of interest.

− First, given the breadth of products that are currently labelled as crypto-currencies, there is a risk that certain coins or tokens (including those issued as part of an Initial Coin Offering (ICO)) may constitute transferable securities and fall within the prospectus regime under FSMA, or alternatively, depending upon how they are structured, some ICOs may instead amount to a collective investment scheme under section 235 of FSMA.

− Secondly, in a recent statement,2 the FCA has confirmed that crypto-currency derivatives are capable of constituting financial instruments under the EU Second Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), although crypto-currencies themselves are not considered to be currencies or commodities for regulatory purposes under MiFID II. It is likely, therefore, that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either crypto-currencies or tokens issued through an ICO, will require authorisation by the FCA.

It is possible that the UK regulators/legislators may choose, in view of Brexit or otherwise, to design a bespoke regime to regulate and govern crypto-currencies and their exchange, or to otherwise broaden existing financial services regulatory regimes to cover crypto-currency activities to the extent not already covered. The Crypto-assets Task Force plans to report its findings in the summer.

Robo-regulation to reduce costs and improve compliance

The Fintech Sector Strategy also includes the development of “robo-regulation” pilot schemes to explore the scope for making regulatory rules machine-executable, and thereby creating the potential for automated or straight-through processing of regulatory reports. In addition to reducing the costs of regulatory compliance (a burden which falls disproportionately on newer, smaller firms), such software could also improve the accuracy of data submissions, and would allow changes to regulatory requirements to be implemented quickly and efficiently.

Shared platforms to reduce barriers to entry

A potential barrier to entry for Fintech firms identified in the strategy, is the need to invest in the systems and processes required to perform complex financial services. The UK government proposes to address this through measures such as “shared platforms”: utilities that would be maintained by the financial services industry in order to reduce the cost to individual firms of implementing their own infrastructure.

Industry standards to foster collaboration

The strategy announces the development of industry standards (sponsored by the UK’s largest banks) to enable Fintech firms to partner with incumbent financial services firms more easily. This would facilitate industry collaboration, by providing Fintech firms with a consistent understanding of what incumbent firms will need from them before entering into partnership arrangements.

New international markets – and a potential global sandbox

The strategy seeks to continue to open up a new international market to UK Fintechs through the announcement of a new “Fintech Bridge” agreement with Australia (in addition to those already established with Singapore, South Korea, China and Hong Kong). The agreement provides a framework for regulatory cooperation and the harmonisation of policies across issues relevant to Fintech (such as the development of open banking regimes) and a range of support for UK Fintechs selling products and services in Australia. The FCA has also taken steps to support international expansion by Fintech firms and is exploring the merits of creating of a “global sandbox”.

Financial inclusion

The strategy identifies new opportunities offered by UK Fintech, such as its potential to support financial inclusion by providing those who are underserved by traditional financial services firms with access to tailored financial products at a fair price. The strategy emphasises the need for the benefits of Fintech to have nationwide reach, and announces plans to strengthen its regional approach through appointing new envoys across the UK.

In the midst of relative uncertainty, what is certain from the UK government’s strategy is that there is appetite for change and further development in the UK Fintech sector over the coming years, which will hopefully create opportunities.

Footnotes:

1. Letter from Andrew Bailey, FCA, to Nicky Morgan MP, Treasury Select Committee dated 30 January 2018. 

Further information

This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – karen.birch@allenovery.com, or tel +44 20 3088 3710.

Legal and Regulatory Risk Note
United Kingdom

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