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As Regulatory Impact unexpectedly fell in the month of November, VIXIO discusses preparation of the UK’s new Consumer Duty, something that will have significant impact on payments, and considers reasons behind the falling regulatory activity in Canada.
Global regulatory impact in November 2022 measured 37, lower than in October (41.8) and an unexpected fall for the month based on previous annual trends. Lower impact was a result of lower overall activity, particularly in the EU — both supranationally and via individual member states — and in the US.
Regulatory activity for the month was also lower when compared with November 2021, despite a 50 percent increase during the year in terms of the number of countries monitored by VIXIO (69 v 45). At the same time, however, the number of actionable events rose for the first time since May 2022 to 37, and was at its highest since June 2022, albeit still well below the 81 high of March 2022. This was driven by higher actionable activity in the UK, Russia and Australia, specifically:
- UK - consumer credit and buy now, pay later (BNPL) rules, and multiple updates to sanctions.
- Russia - updates to a number of counter-sanctions measures, such as Type C bank accounts.
- Australia - Consumer Data Right (CDR) designation for non-bank lenders, updated regulatory supervisory levies and a United Nations (UN) sanctions update.
Consumer Duty preparations
A new milestone for the Consumer Duty rules was set in the UK, with October 31, 2022 marking the day that firms became obliged to start implementing the new requirements. However, as evidence gathered by VIXIO in June 2022 has shown, payments and compliance experts have a number of concerns about the requirements, which the FCA itself has acknowledged.
For example, Hari Bhambra, global head of compliance solutions at Apex Group, noted common concerns relate to consequential costs of increased compliance, any reduction of product offerings and the impact on market positioning.
Max Savoie, a partner at Sidley Austin, also said that “determining whether and how the various rules and guidance under the duty apply to firms” will be “challenging” for them to work through, while Kate Robinson, principal at Avyse Partners, warned of a potential struggle “with the lack of clarity and guidance on how to behave”.
Tony Craddock, the Payment Association’s director general, complained that the FCA was trying to “solve a problem that really does not exist within the payments sector”.
In response, the FCA has set out to address these concerns. The regulator has been proactive in giving speeches and webinars defending the proposals as universal good practice, but has also emphasised that bigtech is the main sector that it will be watching, particularly to stop it gaining monopoly market share via access to transaction data. The FCA is also framing the argument as “reducing the number of complaints going to the financial ombudsman”, and reducing costs from the financial services compensation scheme, “particularly for small businesses”.
Additionally, the FCA has confirmed that a "Dear CEO" letter specifically targeting payments and e-money firms will be issued within “the next few months”.
Addressing competitiveness
However, the FCA may face calls for a scaling back of the new requirements, particularly in B2B activity and in the payments sector more generally, where some industry voices have claimed that this could actually prevent end-users from getting the most suitable products.
The UK government has already made attempts to influence the scale and scope of financial regulators’ independence. Previously, it proposed call-in powers that would have allowed HM Treasury to influence regulators, although this was later questioned and scrapped.
More recently, Chancellor Jeremy Hunt has changed the FCA’s remit to focus on “growth and international competitiveness”. This is part of more than 30 regulatory reforms aimed at increasing growth and investment in the UK, although these actions were also criticised by the governor of the Bank of England (BoE) during the presentation of the latest Financial Stability Report (FSR).
Given regulator concerns over government interference in their independence and other reforms, as well as back-tracking from the government over its call-in powers, we will have to wait to see to what extent the government will continue to pursue its reform of the regulators.
The Changing Nature of Regulatory Activity in Canada
In addition to the Consumer Duty in the UK, a number of proposed changes were made in the payments sector in Canada in November. As part of its autumn statement, the government of Canada is consulting on a variety of measures, including:
- Reducing credit card fees for small businesses through an “agreed solution” with the Canadian card industry, or via proposed amendments to the Payment Card Networks Act, in lieu of an industry agreement.
- Addressing the digitalisation of money to “maintain financial sector stability and security”, and to prevent crypto from evading “global sanctions and fund[ing] illegal activities”.
For now, there remains a lack of details for these proposals. However, similar measures are being pursued elsewhere in the world, including in the EU and UK with respect to crypto, which could offer potential guidance to help inform its decision making.
The Bank of Canada has also published a framework for the Retail Payments Activity Act from June 2021. This requires payment service providers (PSPs) to register with the central bank and implement a risk management framework and failure to comply will result in enforcement action by the regulator.
Declining activity
Although these changes represent quite a shift in the Canadian payments sector — particularly as the Retail Payments Activity Act marks the first time that payments have been regulated in Canada — the wider trend over the last few years is towards less regulatory activity overall.
Since 2019, regulatory activity in Canada has gradually decreased, with only 15 regulatory events in 2022, almost four times fewer than the 56 events seen in 2019. On top of that, the proportion of events that are actionable has also gradually decreased, from 43 percent in 2019 to 33 percent in 2022, while the proportion of less impactful, informative events rose from 23 percent to 33 percent.
The trend towards lower activity strongly correlates to the parliamentary power of Canadian Prime Minister Justin Trudeau. In September 2019, Trudeau lost his majority, gaining 46 percent of parliamentary seats and only 33 percent of the popular vote. In September 2021, he performed similarly poorly in the federal election, winning 47 percent of parliamentary seats and 33 percent of the popular vote once again.
Examining regulatory activity in more detail with the below graph shows noticeable changes around the time of each election, with three tranches emerging — one before the 2019 election, one before Q2 2022 and one after — with the most recent tranche showing a more significant drop-off.
Previously, VIXIO has also gathered evidence from Singapore, Australia and the UK showing that elections can have a significant effect on regulatory activity. However, in these cases regulatory activity was lower before the election and steadily became higher afterwards.
One of the reasons for high activity just before the election in Q2 2019 was the ongoing revision of Canada’s private-sector data privacy law, the Personal Information Protection and Electronic Documents Act (PIPEDA). In Q2, this included a variety of guidance documents and updates, such as the discussion paper on PIPEDA from the Canadian government (but not from an independent regulator).
Although the publication of these documents may simply be circumstantial, it is also possible that there was an impetus from Trudeau’s government to set into motion its agenda, including on data privacy issues, in case it lost the election. Prior to the 2019 election this seemed prudent, with the polls predicting that Trudeau would lose to the Conservative Party of Canada. This can also be seen somewhat in 2020 and 2021, with a steady climb in regulatory activity before the election, culminating in a sharp drop-off in Q2 2021, from which it is yet to recover.
At the same time that activity has fallen, however, there have still been several notable changes. These include regulating payments in Canada for the first time; regulating the crypto sector; capping card fees; and attempting to launch a new payment system.
