Following increasing in regulation in the FinTech space we expect this to be a continuing trend for 2020 as we look at what’s coming up in the year ahead
1. Open Banking
Open banking, or PSD2 as its known in Europe, is a new set of regulations which started coming into effect in 2018 which allow third party technology companies and other FinTechs to access banks’ customer data provided they have customers’ permission. Whilst banks are continuing to work on compliance with PSD2, not least meeting the milestones for strong customer authentication by end of 2020, we also expect them to start looking at revenue generating opportunities created by PSD2.
There are some examples of banks using APIs to get their own data back again and we could see challenger banks start to come under pressure as the bigger banks attempt to out innovate start-ups by building on their longstanding strongholds over their customer base.
2. Continued attention on AI and Machine Learning
Both the Bank of England and the FCA have recognised AI and Machine Learning as increasingly important fields of innovation in the financial services sector. In January of this year the FCA and the Bank of England established a Financial Services AI Public Private Forum to better understand the use and impact of AI and Machine Learning and explore means to support safe adoption of these technologies within financial services, whether this be via guidance, regulation or otherwise.
Ethical use of AI is also likely to get a lot of attention. As AI is introduced into methods of service delivery, incidents of algorithmic discrimination have exposed the tendency of machine learning to magnify the prejudices that skew human decision-making against women and ethnic minorities, which machines were supposed to avoid. Regulators have been urged by the Treasury Committee to monitor the discriminatory potential of AI and set clear guidance for its use highlighting that firms shouldn’t use this technology if the discrimination risks cannot be addressed.
3. Operational Resilience in 2020
In December 2019, the Bank of England, the PRA and the FCA published consultation papers to implement a stronger regulatory framework to promote greater operational resilience of regulated firms and financial market infrastructures. This is in the wake of larger and more frequent systems failures and hacks, and in the context of certain systemic risks being concentrated as firms increasingly outsource key functions.
With firms looking at arrangements to ensure that they are operationally resilient, this could potentially include further collaboration between firms in areas such as cyber security. The consultations all close on 3 April 2020.
4. Move by Big Tech into finance
Open Banking has also been allowing big tech to get in on the action with the likes of Amazon looking to use open banking to make more informed lending decisions to bolster its relatively small lending business. Access to bank’s customer data via the use of APIs allows third party technology companies to see information such as repayment histories and income from other online marketplaces. We expect to see continued and more coordinated scrutiny of these moves by regulators in the finance, data and competition spheres.
Some commentators are also questioning whether bank data sharing should be extended to other sectors and allow banks to get data out of big tech. This is in line with the Bank of England’s vision of “Open Finance” and the extension of existing policy of data sharing through open banking to much wider data sets (capturing data held at utilities companies, search, rating and social media data, and data from public sources, such as the Passport Office, DVLA, HMRC and Companies House).
5. Regulatory Treatment of Cryptoassets
UK regulators are continuing to scrutinise the use of cryptoassets and how they should be treated from a regulatory perspective. HM Treasury is due to consult on potential changes to the regulatory perimeter and whether it should be extended to cryptoassets, with comparable features to specified investments. This consultation was expected to take place in 2019 however it is now on the horizon for 2020.
The European Commission also published a similar consultation in December 2019 in which it is seeking views on extending the existing regulatory framework to cryptoassets and stablecoins. The feedback period in relation to this consultation ends on 12 March 2020.
6. Cryptoassets come within the scope of AML regulation
Amongst other changes MLD5, which EU Member States were required to transpose by 10 January 2020, extended AML requirements to virtual currency exchange platforms and custodian wallet providers. Alongside this HM Treasury confirmed at the end of 2019 that it would extend AML requirements to firms offering cryptoassets exchange services, firms involved in the issuance of new cryptoassets and cryptoasset ATMs. However, it will not extend these requirements to non-custodian wallet providers. The proposed definition of cryptoassets includes exchange, security and utility tokens and therefore captures all 3 types of crytoasset classes.
7. Digital Payments
Digital payments is set to be a key area of focus in 2020 of following the Treasury’s 2019 review of the payments landscape. The Bank of England’s Financial Policy Committee (FPC) has also agreed a set of principles that will guide its assessment of how prudential regulation and supervision should adjust to fast-moving developments in payments activities, which it recognises as a focal point for innovation in financial services.
8. Cross-Border Payments
The Bank of England will continue its work in developing frictionless cross-border payments and its collaboration with other central banks as they look to harmonise international standards. The idea of a central bank digital currency has been increasingly mooted worldwide as a way to help improve payment systems and cross-border transactions. On 21 January 2020, the Bank of England and the European Central Bank announced that they have teamed up with other major central banks to assess the case for launching their own digital currencies, as well as the potential cross-border interoperability of such technologies.
Regulators around the globe are considering their response to the regulation of stablecoins as the emergence and proliferation of stablecoins (such as Facebook’s Libra coin) continues as a key global trend in the evolution of payment systems. Whilst the FCA has provided specific regulatory guidance on the application of the UK regulatory framework to stablecoins, at an international level the Financial Stability Board (FSB) will be reporting on the adequacy of existing regulatory approaches. We may therefore see national payments regulatory frameworks shift as a result. The FSB has indicated that it plans to issue a public consultation on the issue in April 2020.
10. Smart Contracts and Cryptoassets
In November 2019 the UK Jurisdiction Taskforce (UKJT) of the LawTech Delivery Panel issued a legal statement on the status of cryptoassets and smart contracts under English law. Providing legal certainty on the status of cryptoassets and smart contracts for the first time, the statement from the UKJT recognised cryptoassets as property and smart contracts as enforceable under English law. This has been seen by many as an important boost to the legal certainty of smart contracts in the UK and may make the UK a more attractive jurisdiction for the FinTech sector.
As the legal and regulatory status of cryptoassets and smart contracts continues to become clearer, we are likely to see further deployment of distributed ledger technologies and smart contracts in areas such as capital markets.