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As innovation is changing the traditional payments landscape, the UK Financial Conduct Authority (FCA) has identified areas where new market players can escape its regulatory reach. In its new Perimeter Review, the FCA advises the government on how to fill these gaps.
On Thursday (October 21), the FCA published its annual Perimeter Report, identifying gaps in legislation that place certain financial services market players outside its regulatory reach.
One of the areas where changes are warranted, the report notes, is the payments market. It has experienced an increase in intermediation and innovation, leading to new business models which are currently outside the FCA’s perimeter.
To address many of these issues, HM Treasury carried out the Payments Landscape Review, which concluded earlier this month by establishing four priority areas and actions for policymakers and the industry.
These included plans to strengthen consumer protections within Faster Payments, promote open banking enabled payments, enhance cross-border payments and future-proof the regulatory and legislative framework that governs payments.
The FCA has confirmed in the report that it “will be working closely with the Treasury in the coming months to lay the foundations to delivering on these priorities”.
Crypto-assets
The regulator is also concerned that current regulations in the crypto-asset market leave many outside its regulatory perimeter.
Although the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) require certain crypto-asset companies, such as exchanges and wallet providers, to register with the regulator and implement robust anti-money laundering (AML) control frameworks, it only applies to businesses that are operating in the UK.
In addition, the registration process had a shaky start. In almost two years, the FCA has registered just 12 firms, while 90 percent of the applicants had chosen to withdraw their applications, or were being refused.
According to the FCA, this is because “a relatively large number of applications to us have been of poor quality and we have identified significant concerns during many of our assessments”.
There are also concerns that firms, such as crypto-asset businesses, that are not authorised under the Financial Services and Markets Act 2000 (FSMA), but are supervised under the MLRs, face far less demanding registration standards than those applicable under FSMA.
It means that the FCA does not have the same broad remit and powers to supervise and enforce against these registered firms as it would for firms authorised under FSMA.
“We consider that the regime could be strengthened if the criteria used to determine fitness or propriety included, for example, specific criteria in relation to adequate governance and financial resilience,” the report adds.
Considering its current limited powers, the FCA states it will “continue to work with the Treasury and other regulators to inform thinking on where further regulatory or legislative change is needed”.
Online Safety Bill
The review also makes suggestions on how to improve the government’s Online Safety Bill, which aims to protect consumers from illegal online scams.
Noting that the number of consumer reports on scams has increased by 77 percent during the last year, the FCA proposes the strengthening of consumer protections within the bill.
Among other things, the agency advises to set clear legal obligations on platform operators and to designate content relating to fraud offences as "priority" illegal content and so require monitoring and preventative action by platforms.
Individual accountability
The review highlighted that the UK’s Senior Managers and Certification Regime (SM&CR), which makes senior managers accountable for the conduct of their businesses, does not apply universally. For instance, it does not apply to payment and e-money firms, which are not authorised under FSMA.
Therefore, the regulator said it sees value in extending the SM&CR to these firms, and it will continue to work with the Treasury on this issue.
“We see the SM&CR as a key part of transforming culture in the financial industry and an important supervisory tool.”
