Digital markets, funding and payment servicesi Digital markets and funding
The UK has a very strong market in crowdfunding, peer-to-peer (P2P) lending and payment services, all of which sit alongside the UK's world-leading financial services marketplace.
The crowdfunding market in the UK is particularly mature and sophisticated – so much so that in July 2018 the FCA launched a consultation into the market in order to identify whether the existing regulatory framework is still relevant and robust enough to ensure good standards of business are practised by the platforms, particularly where retail investors are involved.
Certain crowdfunding activities require authorisation by the FCA and others do not. All crowdfunding platforms are subject to the FCA's general high-level standards, including the Principles for Businesses and specific Conduct of Business rules, for example in relation to financial promotions. However, there are differences in the detailed regulatory frameworks that apply to investment-based and loan-based (or P2P) crowdfunding platforms.
Investment-based crowdfunding has evolved from more traditional ways of seeking equity-based investments, and the FCA regulates it as such. Therefore, an investment-based platform will usually ask for authorisation from the FCA to carry on activities such as arranging deals in investments (Article 25 RAO), dealing in investments as an agent (Article 21 RAO) and advising on investments (Article 53). Platforms that provide a nominee structure must also apply for a safeguarding and administration of assets permission (Article 40).
Operating a P2P platform was not adequately captured under the existing list of regulated activities, so, in 2014, the FCA introduced the new activity of operating an electronic system in relation to lending (Article 36H RAO), which captures most of what P2P platforms will be carrying on in practice. However, care should be taken if other regulated activities are built into the business model, such as credit broking, debt administration and debt-collecting, each of which require separate permission from the FCA.
The creation of secondary markets on platforms is not prohibited, but is becoming increasingly unusual with the more established platforms because of the additional regulatory burden of doing so (not least because of the potential financial promotion issues). It is more common for platforms to create venture capital-like fund structures that give investors the ability to exit the fund without having to find other users to buy their units.ii Payment services
The payment services caught by the PSRs include, among other things, services relating to the operation of payment accounts (e.g., cash deposits and withdrawals from current accounts and savings accounts), execution of payment transactions (whether covered by a credit line or otherwise), card-issuing and money remittance. PSD2, as implemented by the PSRs, also creates authorisation and registration regimes for payment initiation service providers (PISPs) and account information service providers (AISPs). These were newly defined regulated activities in 2017 and are intended to capture those businesses that look to utilise open banking standards to provide consumers with detail about their financial position by taking information directly from their banking providers, or that facilitate payments directly from users' bank accounts without the need to use a payment card.
Firms offering payment services are required to identify at the outset whether they will apply for registration or authorisation under the PSRs. Small payment institutions (SPIs), small electronic money institutions (EMIs) and firms that will only offer account information services can apply to be registered as such, or as a registered account information service provider (RAISP), and a lighter touch registration and conduct regime will apply to those firms. Firms that do not quality as an SPI, small EMI or RAISP but that intend to carry on payment services in the EEA must apply for authorisation and follow more onerous conduct of business requirements. These alternative routes are particularly popular where available.
PSD2 and the PSRs also facilitated new open banking standards, requiring banks and building societies to give third parties access to customers' accounts and data where the user consents to it. At the moment, only the UK's nine largest banks and building societies must make customer data available through open banking, but a number of smaller banks and building societies have also opted in to the regime. Relevant third parties that benefit from the open banking regime include PISPs and AISPs, who are able to use customer account data to provide these new breeds of services.