Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

The FCA is the financial services regulator for most regulated activities and services that a fintech would provide. The Prudential Regulation Authority (PRA) is the regulator for banks in the UK. The FCA regulates conduct matters for banks.

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

There are a large number of activities (‘specified activities’) that, when carried on in the UK by way of business in respect of specified kinds of investments, trigger licensing requirements in the UK. These are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). While it is not practical to list them all, the most common include the following:

  • Accepting deposits: this is mainly carried on by banks and building societies. An institution will accept a deposit where it lends the money it receives to others or uses it to finance its business.
  • Dealing in investments (as principal or agent): buying, selling, subscribing for or underwriting particular types of investments. In respect of dealing as principal, the specified investments are ‘securities’ and ‘contractually based investments’. In respect of dealing as agent, the specified kinds of investments are ‘securities’ and ‘relevant investments’:
    • securities include shares, bonds, debentures, government securities, warrants, units in a collective investment scheme (CIS) and rights under stakeholder and personal pension schemes;
    • contractually based investments include rights under certain insurance contracts (excluding contracts of general insurance), options, futures, contracts for differences and funeral plan contracts; and
    • relevant investments include the same investments as contractually based investments but also include contracts of general insurance.
  • Arranging deals in investments (this is split into two activities and specified investments in respect of arranging include securities and relevant investments):
    • arranging (bringing about) deals in investments, which applies to arrangements that have the direct effect of bringing about a deal; and
    • making arrangements with a view to transactions in investments, which is much wider and includes arrangements that facilitate others entering into transactions.
  • Advising on investments: advising a person in their capacity as an investor on the merits of buying, selling, subscribing for or underwriting a security or relevant investment or exercising any right conferred by that investment to buy, sell, subscribe for or underwrite such an investment.
  • Managing investments: managing assets belonging to another person, in circumstances involving the exercise of discretion, where the assets include any investment that is a security or contractually based investment.
  • Establishing, operating or winding up a CIS: this is discussed in more detail in question 7.
  • Certain lending activities: entering into a regulated mortgage contract or a regulated (consumer) credit agreement (or consumer hire agreement) as lender.
  • Certain insurance activities: effecting a contract of insurance as principal and carrying out a contract of insurance as principal.
  • Payment services: providing payment services.
  • Electronic money: issuing electronic money.
Consumer lending

Is consumer lending regulated in your jurisdiction?

The general position is that lending by way of business to consumers is regulated in the UK. The FCA is responsible for authorising and regulating consumer credit firms.

There are two categories of regulated lending: regulated credit agreements and mortgages.

Any person (A) who enters into an agreement with an individual (or a ‘relevant recipient of credit’, which includes a partnership consisting of two or three persons not all of whom are bodies corporate and an unincorporated body of persons that does not consist entirely of bodies corporate and is not a partnership) (B) under which A provides B with credit of any amount must be authorised by the FCA - unless an appropriate exemption applies.

Two of the most common exemptions are: where the amount of credit exceeds £25,000 and the credit agreement is entered into wholly or predominantly for business purposes; and where the borrower certifies that they are ‘high net worth’ and the credit is more than £60,260.

Other complex exemptions are available that relate to, among other things, the total charge for the credit, the number of repayments to be made under the agreement and the nature of the lender.

If an exemption applies, the lender does not need to comply with the detailed legislative requirements that apply to regulated credit agreements contained in the Consumer Credit Act 1974 (CCA) (and secondary legislation made under it) and the FCA’s Consumer Credit Sourcebook (CONC).

Broadly, the CCA sets out the requirements lenders need to comply with in relation to the provision of information, documents and statements and the detailed requirements as to the form and content of the credit agreement itself.

The CONC chapter in the FCA Handbook sets out detailed rules that regulated consumer credit firms must comply with and covers areas such as conduct of business, financial promotions, pre-contractual disclosure of information, responsible lending, post-contractual requirements, arrears, default and recovery, cancellation of credit agreements and agreements that are secured on land.

In addition to the CONC, authorised consumer credit firms must also comply with other applicable chapters of the FCA Handbook.

Failing to comply with the requirements of the CCA may result in those agreements being unenforceable against borrowers and the FCA imposing financial penalties on the firm in question.

Entering into a regulated mortgage contract (RMC) is a regulated activity. Such contracts are loans where:

  • the contract is one under which a person (lender) provides credit to an individual or trustee (borrower);
  • the contract provides for the obligation of the borrower to repay to be secured by a mortgage on land in the European Economic Area (EEA); and
  • at least 40 per cent of that land is, or is intended to be, used:
    • in the case of credit provided to an individual, as or in connection with a dwelling by the borrower; or
    • in the case of credit provided to a trustee that is not an individual, as or in connection with a dwelling by an individual who is a beneficiary of the trust, or by a related person.
Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

Provided that the loan itself is being traded, and not the loan instrument (eg, an instrument creating or acknowledging indebtedness), then there are no restrictions on trading loans in the secondary market.

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

Establishing, operating or winding up a CIS is a regulated activity in the UK for which firms must be authorised by the FCA.

The definition of a CIS is set out in section 235 of the Financial Services and Markets Act 2000 (FSMA 2000). Broadly speaking, a CIS is any arrangement with respect to property of any description, the purpose or effect of which is to enable the persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The persons participating in the arrangements must not have day-to-day control over the management of the property. The arrangements must also have either or both of the following characteristics:

  • the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
  • the property is managed as a whole by, or on behalf of, the operator of the scheme.

Whether a fintech company falls within the scope of this regime will depend on the nature of its business. For example, fintech companies that manage assets on a pooled basis on behalf of investors should consider carefully whether they may be operating a CIS. On the other hand, fintech companies that only provide advice or payment services may be less likely to operate a CIS. Fintech companies are advised to seek legal advice on this subject and to have regard to their other regulatory obligations.

Alternative investment funds

Are managers of alternative investment funds regulated?

Managers of alternative investment funds are regulated in the UK under the Alternative Investment Fund Managers Directive (AIFMD), which has been implemented in the UK by the Alternative Investment Fund Managers Regulations 2013 and rules and guidance contained in the FCA Handbook.

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

P2P lending is a term that generally refers to loan-based crowdfunding. In the UK, the FCA regulates loan-based crowdfunding platforms.

Under article 36H of the RAO, operating an electronic system that enables the operator (A) to facilitate persons (B and C) becoming the lender and borrower under an article 36H agreement is a regulated activity (and a firm will require FCA authorisation) where the following conditions are met:

  • the system operated by A is capable of determining which agreements should be made available to each of B and C;
  • A (or someone acting on its behalf) undertakes to receive payments due under the article 36H agreement from C and make payments to B that are due under the agreement; and
  • A (or someone acting on its behalf) takes steps to procure the payment of a debt under the article 36H agreement or exercises or enforces rights under the article 36H agreement on behalf of B.

An article 36H agreement is an agreement by which one person provides another with credit in relation to which:

  • A does not provide the credit, assume the rights of a person who provided credit or receive credit; and
  • either the lender is an individual or the borrower is an individual and the credit is less than £25,000, or the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.

In addition to falling within the definition of an article 36H agreement, a loan may also constitute a regulated credit agreement, unless an exemption applies (see question 5) and so a lender, through a platform authorised under article 36H, may also be required to have permission to enter into a regulated credit agreement as lender.

The FCA recently produced a policy statement confirming that new rules will come into place in December 2019 in relation to P2P lending. These will include:

  • enhanced requirements for platform governance arrangements including in relation to credit risk assessment, risk management and fair valuation practices;
  • strengthening rules on wind-down planning in the event of platform failure;
  • setting out the minimum information that a platform should provide to investors; and
  • introducing a requirement to monitor the investors that can use a platform, including that platforms assess investors’ knowledge and experience of platform lending where no advice has been given to them. Firms are required to ensure that retail clients:
    • be certified or self-certified as ‘sophisticated investors’ or ‘high net worth investors’; or
    • confirm before a promotion is made that they will receive regulated investment advice or investment management services from an authorised person; or
    • not invest more than 10 per cent of their net investible assets in P2P agreements in the 12 months following certification.
Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

In the UK, reward-based crowdfunding (where people give money in return for a reward, service or product) and donation-based crowdfunding (where people give money to enterprises or organisations they wish to support) are not currently regulated in their own right.

Equity-based crowdfunding is where investors invest in shares in, typically, new businesses. Equity-based crowdfunding is not specifically regulated in the UK (in the same way as loan-based crowdfunding).

However, a firm operating an equity-based crowdfunding service must ensure that it is not carrying on any other regulated activity without permission. Examples of regulated activities that equity-based crowdfunding platforms may carry on (depending on the nature and structure of their business) include:

  • establishing, operating or winding up a CIS;
  • arranging deals in investments; and
  • managing investments.

Additionally, equity-based crowdfunding platforms must not market to retail clients unless an appropriate exemption applies.

The FCA recently produced a policy statement in respect of investment-based crowdfunding platforms. Recent work has focused on restrictions on the types of clients these platforms can market to and how this is managed. Further analysis and regulator comment is expected.

Invoice trading

Describe any specific regulation of invoice trading in your jurisdiction.

Currently, there are no regulations relating specifically to invoice trading.

However, depending on how the business is structured, a firm that operates an invoice-trading platform may be carrying on regulated activities for which it must have permission, including:

  • establishing, operating or winding up a CIS; and
  • managing an alternative investment fund.
Payment services

Are payment services regulated in your jurisdiction?

Payment services are regulated under the Payment Services Regulations 2017, which implement the second Payment Services Directive (PSD2) in the UK. Payment services include:

  • services enabling cash to be placed on a payment account and all the operations required for operating a payment account;
  • services enabling cash withdrawals from a payment account and all the operations required for operating a payment account;
  • the execution of the following types of payment transaction:
    • direct debits, including one-off direct debits;
    • payment transactions executed through a payment card or a similar device; and
    • credit transfers, including standing orders;
  • the execution of the following types of payment transaction where the funds are covered by a credit line for the payment service user:
    • direct debits, including one-off direct debits;
    • payment transactions executed through a payment card or a similar device; and
    • credit transfers, including standing orders;
  • issuing payment instruments or acquiring payment transactions;
  • money remittance;
  • payment initiation services (initiating a payment order at the request of a payment service user with respect to an account held with another payment service provider); and
  • account information services (online service to provide consolidated information on one or more payment accounts held by the payment service user with another one (or more) payment service provider).

PSD2 broadens the scope of transactions governed by its provisions, narrows the scope of certain exclusions, amends the conduct of business requirements and introduces security requirements.

To provide payment services in the UK, a firm must fall within the definition of a ‘payment service provider’. Payment service providers include ‘authorised payment institutions’, ‘small payment institutions’, credit institutions, electronic money institutions, the post office, the Bank of England and government departments and local authorities.

A firm that provides payment services in or from the UK as a regular occupation or business activity (and is not exempt) must apply for authorisation or registration as a payment institution.

Open banking

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

Following its investigation into the retail and SME banking sectors between 2013 and 2016, the UK’s competition authority (the Competition and Markets Authority (CMA)) ordered a number of remedies to help promote greater competition in the retail and SME banking markets.

One of the core remedies ordered by the CMA requires the nine largest retail banks in Great Britain and Northern Ireland to develop and implement an open banking standard application programming interface (API) to give third parties access to information about their services, prices and service quality in order to improve competition, efficiency and stimulate innovation. The open APIs also allow retail and SME customers to share their own transaction data with trusted intermediaries, which can then offer advice tailored to the individual customer.

These measures are intended to make it easier for customers to identify the best products for their needs. Additionally, PSD2 (see question 12) requires banks to allow third-party payment service providers to initiate payments from their customers’ accounts.

Insurance products

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Effecting or carrying out a contract of insurance is a regulated activity and fintech companies that wish to do this must be regulated. Companies that wish to market insurance products must either be regulated, have their marketing material approved by a regulated firm or fall within an applicable exclusion (see question 18).

Credit references

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

Providing credit information services and providing credit references are regulated activities for which firms must be regulated. A firm provides credit information services where it takes any of the following steps (or gives advice in relation to any of the following steps) on behalf of an individual or relevant recipient of credit:

  • ascertaining whether a credit information agency holds information relevant to the financial standing of an individual or relevant recipient of credit;
  • ascertaining the contents of such information;
  • securing the correction of, the omission of anything from, or the making of any other kind of modification of, such information; and
  • securing that a credit information agency that holds such information:
    • stops holding the information; or
    • does not provide it to any other person.

Providing credit references involves providing people with information relevant to the financial standing of individuals or relevant recipients of credit where the person has collected the information for that purpose.

In addition, the Small and Medium-Sized Business (Credit Information) Regulations 2015 (SMB Regulations) require:

  • designated banks to share specified credit information about SMEs with designated credit reference agencies (with the permission of the relevant SME); and
  • designated credit reference agencies to provide this information to finance providers at the request of the SME and to the Bank of England.

While the provision of this information is not a regulated activity under FSMA 2000, the FCA does monitor and enforce compliance with the SMB Regulations.