With the UK striving to strike a balance between supporting innovation and ensuring financial security within its financial systems, existing regulations have allowed for many fronts to flourish in a legal grey area. The winding down of venture capital backing ushers in a new era for fintech, as a decade of constant, unchecked growth slows down to match the smaller volumes of funding available for expansion.
The drying up of growth-centric venture capital funds has prompted many fintech companies to put their sights on profitability to ensure their survival in the long run. Coinciding with this change in the business approach of fintech companies, policymakers brought in a slew of regulatory fronts focussing on crypto, BNPL, and open banking. However, the repeated changes in the government have not helped these regulations keep up with the rate of change in the real world. Will 2023 be the year when the UK finally catches up with fintech and decentralized banking?
The FCA’s Balancing Act
For the last two decades, financial regulation in the UK has been driven by consumer protection, promoting innovation, and creating structures that create safety for the end-user. The Financial Conduct Authority or FCA oversees the regulatory framework in the country. Nearly a decade ago, the FCA established its Sandbox program to encourage experimentation and support fintech startups in a fail-safe environment. The FCA also creates guidelines for products and services such as P2P lending, crowdfunding, and decentralized payment services. With new technologies and products emerging daily, it begs the question: is the Sandbox ready for the next decade?
The “Edinburgh Reforms”
Announced in December 2022, the “Edinburgh Reforms” are slated to “turbocharge growth” for the UK as the most significant overhaul of banking rules in 30 years. Building on the government’s reform agenda, this overhaul is aimed at taking advantage of the opportunities provided by the UK’s exit from the EU to tailor regulations to suit the country’s needs. A set of 30 regulatory reforms for financial services have been outlined for review and replacement.
One of the key changes proposed in the Edinburgh Reforms aims to end the long-standing separation enforced on the banks between their retail and investment arms, even in the latter’s absence. Freeing retail-focused banks from these tight regulations will allow them to provide better products for their customers while maintaining a high level of consumer protection, especially in the case of Neobanks.
While the new law on Buy Now Pay Later may not arrive this year, the Consumer Credit Act is likely to be reformed to bring in the biggest change to the UK’s consumer credit law in recent times. The original law of 1974 sees very little mention of BNPL, and it’s more crucial than ever before to bring digital lending under the ambit of the FCA’s regulations as many people opt-in for these schemes without reading into the details and wind up in debt.
With the initial assumption that decentralized currency would lead to higher levels of transparency being proved wrong with the number of scams, scandals, and frauds emerging out of the crypto world, implementing regulations and compliance monitoring on crypto is high on the agenda for UK lawmakers according to Rightlander.
Thomas Tudehope, global head of public policy for crypto exchange Luno, wrote in an article that a significant step has already taken shape in the form of an amendment tabled by Andrew Griffith MP and HM Treasury to the Financial Services and Markets Bill. This amendment will likely introduce a full comprehensive regulatory regime for cryptocurrency in 2023, according to Tudehope.
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