THE UK FINTECH MARKET
THE UK FINTECH
MARKET
Agenda
1. Welcome and introduction of the DIT Financial Services
2. Regulation of the UK Financial Sector
3. The impact of regulation on the FinTech sector
4. UK Regulatory Initiatives
5. FinTech bridges
6. Impact of Brexit on FinTech
7. Q&A
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What we do
The DIT – Financial Services team supports and promotes the UK
financial and professional services industries focusing on:
• FinTechs
• Insurance & Reinsurance
• Asset Management
• Legal and Professional Services
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How we do it
Matchmaking services
Legal SupportPolitical/Economic analysis
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Department for International Trade (DIT) Webinar
The UK FinTech Market
20 January 2017
Harry Eddis
STRICTLY CONFIDENTIAL
Regulation of the UK Financial Sector
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Regulators and Regulations – Europe & UK
•FSMA
•Regulated Activities Order
•FCA/PRA Handbooks
•PSRs
•Consumer Credit Act
•MiFID
•EMIR
•CRD/CRR
•AIFMD
•PSD
•Consumer Credit Directive
•Bank of England
•PRA
•FCA
•Payment Systems Regulator
•European Commission
•ESMA
•EIOPA
EU Regulators
UK Regulators
UK Regulation
EU Regulation
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UK Regulatory Framework
> FSMA 2000 is the key statute (with some key changes in Financial
Services Act 2012) with a number of statutory instruments
> The General Prohibition - Firms carrying out a “regulated activity in the
UK must be authorised or exempt from authorisation” (section 19
FSMA)
> An activity is a regulated activity in the UK if:
1. It is an activity of a specified
kind
3. It is carried on by way of
business
2. (For most activities) it relates to
an investment of a specified kind
4. It is carried on in the UK
5. No exemption is available: a wide range of exemptions may be available for certain activities or certain persons (e.g. purely intra-
group activities are typically exempt).
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Regulated Activities and Investments in the UK
Typical Specified Investments Typical Specified Activities
Deposits Accepting deposits
Shares Dealing in investments as principal or agent
Debentures Arranging deals in investments
Units Custody of investments
Warrants Advising on investments
Certificates Sending dematerialised instructions
Options Operating a multilateral trading platform
Futures Operating a collective investment scheme
Contracts for Differences Administration of insurance contracts
Insurance Policies Entering into regulated credit agreements
Mortgages and consumer loans Entering into regulated mortgage contracts
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Who is an authorised person?
> If not exempt, authorisation is required (otherwise offences in FSMA, leading to fines and/or imprisonment)
> “Authorised person” is a firm which has a “Part 4A permission”
> Apply to appropriate regulator:
> Public register of authorised persons (https://register.fca.org.uk/)
PRA
Insurers
Banks
Designated investment firms
(“Dual-regulated firms”)
Assessed by PRA from prudential
perspective and FCA from
conduct perspective
PRA requires FCA’s consent
FCA
Other firms
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Consequences of regulatory authorisation in the UK
> Bound by Rules and Guidance set out in FCA Handbook (arranged in Sourcebooks and Manuals)and, if applicable, PRA Rulebook
> Subject to oversight (and possibly inquiry and enforcement action and related sanctions) by the FCA and, if applicable, the PRA
> Regulatory rules and supervision in relation to the following modules (not exhaustive):
Conduct of
Business
Systems and
Controls
Prudential
Requirements
Fitness and
Probity
Custody of
Cash/AssetsMarket Abuse
Regulatory
Reporting
Training and
Competence
Impact of Regulation on UK FinTech Sector
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London as a FinTech Hub
Source: Deloitte, “The Connecting Global FinTech: Hub Review 2016”
London has the world’s largest
financial services sector,
supported by a booming tech
sector. The ecosystem has the
“Fin” of New York, the “Tech” of
the US West Coast and the
policymakers of Washington, all
within a 15 minute journey on
public transport. These factors
make London one of the
greatest connected global cities
in the world with the key
ingredients for digital success:
capital, talent, regulatory and
government support and
demographic diversity.
“
”
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What is the role of financial regulation in the growth of
FinTech?
> Challenges to traditional regulation and the UK’s FCA response
> Traditional regulation of financial services is being challenged
> Regulators have to reconcile how to apply existing regulation to new products and services likely not event contemplated when the regulation was drafted (bearing in mind its statutory objective to protect consumers)
> Whilst promoting competition (another of its statutory objectives) and fostering innovation
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How is FinTech Regulated in the UK
FinTech itself is not subject to a specific regulatory regime
Law/regulation applies to FinTech solutions in the same way as it does to non-
FinTech solutions
Therefore, if a firm used FinTech as a platform for carrying out a regulated
activity in the UK in relation to a specified investment, that activity will be
regulated and the firm will need a licence to carry out the activities
So, for example, a firm that establishes a FinTech system to record ownership of
properties would not be regulated as properties are not specified investments
and the firm would not be carrying out a regulated activity (see above)
However, a FinTech-based platform for dealing in shares or bonds would involve
the carrying on of regulated activities and firms involved would need to assess
whether they need a licence
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Fintech – is law/regulation a help or hindrance?
BUT: what of law and regulation?
• law/regulation is generally written on a backward-looking basis
• law/regulation can take time to catch up
• There can be a benefit to being regulated: e.g. reputation
• Client-facing vs pure support services?
So: what are some of the key legal/regulatory barriers?
• the requirement to be authorised to provide investment services
• legal enforceability (e.g. smart contracts)
• regulatory priorities
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Potential for regulatory change…
FCA focus on Financial Innovation
Innovation Hub
Regulatory sandbox
HMT Consultation Paper on draft innovation for financial services
Consultation on whether UK regulatory environment effectively supports innovation
Bank of England Digital Currency Team
Currently researching possibilities of central bank virtual currency
ESMA Discussion Paper
Examines potential impact of distributed ledger technology on the securities market
Analogies
Crowd funding
Electronic Signatures Regulations 2002
UK Regulatory Initiatives
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FCA Project Innovate
This FCA project commenced in October 2014 and assisted 175 firms with development
FCA provides direct support and early engagement with innovative firms in the sector
E.g. WealthKernel used the Innovation Hub to develop its automated wealth management solutions business
Criteria for support: genuine innovation, consumer benefit, background research and need for support
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FCA Regulatory Sandbox – Background
Launched spring 2016 as the next step of Project Innovate
The sandbox allows for the testing of innovative products in a safe space:
Reducing time to market
Better access to finance
Waivers or modification of rules
The FCA provides individual guidance and develops safeguards
First cohort closed on 6 July 2016.
24 successful applications out of 69.
Application deadline for cohort two was 19 Jan 2017
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Regulatory Sandbox – Participation
Applications must demonstrate the following criteria:
Significant UK nexus
Genuine innovation
Consumer benefit
Need for sandbox testing
Evidence of background research
Readiness for testing in live environment
Testing on each project will be conducted for 3-6 months
There will be ongoing monitoring and weekly reporting to the FCA
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Regulatory Sandbox – Cohort One Examples
Firm Description
Billon An e-money platform based on distributed ledger technology that facilitates the secure transfer and holding of
funds using a phone based app.
BitX A cross-border money transfer service powered by digital currencies / blockchain technology.
Blink
Innovation
Limited
An insurance product with an automated claims process, which allows travellers to instantly book a new ticket
on their mobile device in the event of a flight cancellation.
Bud An online platform and app which allows users to manage their financial products, with personalised insights,
on a single dashboard. Bud's marketplace introduces relevant services which users can interact with through
API integrations.
Citizens
Advice
semi-automated advice tool which allows debt advisers and clients to compare the key features of available
debt solutions.
HSBC An app developed in partnership with Pariti Technologies, a FinTech start-up, to help customers better
manage their finances.
Otonomos A platform that represents private companies’ shares electronically on the blockchain, enabling them to
manage shareholdings, conduct bookbuilding online and facilitate transfers.
SETL A smart-card enabled retail payment system based on their OpenCSD distributed ledger.
Tramonex An e-money platform based on distributed ledger technology that facilitates the use of “smart contracts” to
transfer donations to a charity.
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Bank of England FinTech Accelerator
Launched June 2016 by Mark Carney
The Bank will work in partnership with FinTech firms to develop new approaches to the delivery of the Bank’s mission and operations
The Bank will appoint FinTech firms to run short Proof of Concept projects in a number of areas, including blockchain
Two cohorts of firms have been selected
Applications for next cohort will open in Spring 2017
Areas of priority for the Bank are:
Metadata management tools
New tools to manage and harvest business rules (including rule languages) that are embedded in systems
Security tools that protect data at rest and in transit
Innovative tools for data cleansing, for example for text strings, and anomaly, trend or changing behaviour detection, particularly in transaction reporting data sets
Competitive and transparent selection process based around a Proof of Concept designed by the Bank.
No requirement for firms to be based in the UK
FinTech Bridges
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FinTech Bridges
Co-operation agreements between regulators aimed at:
Encouraging foreign direct investment flows in FinTech between two countries
Improving information flows between regulators
The UK has currently signed co-operation agreements with:
Each co-operation agreement subject to negotiation between the FCA and local overseas
regulator so will be framed differently
UK government commissioned EY report on opportunities for FinTech investment in China and
the UK in advance of the co-operation agreement
ASIC MAS PBCFSC HKMA
Impact of Brexit
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Brexit: Timing
UK voters decide that the
UK should leave the EU
23 June 2016
EU referendum:
‘Should the United
Kingdom remain a
member of the EU or
leave the EU?’
A vote to leave does
not equal immediate
departure: No
immediate impact on
legislation, although
government will have to
decide:
a) when to serve
withdrawal notice
b) its withdrawal
negotiation
objectives
Article 50 notification: No
provision on timing of serving
withdrawal notice.
Constitutional issues?
March 2017?
2-year negotiation period
of the terms of UK
withdrawal: could be
extended only by
unanimous agreement of all
Member States.
Withdrawal agreement (or
agreements) signed.
Still negotiating (with
approval of all Member
States)
or
New arrangement in place
March 2019?
or
No agreement. All treaty
rights and obligations
lapse. WTO terms apply.
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Brexit: Challenges and Opportunities for Fintech
Challenges
Impact of uncertainty on investment
Risk of London losing ground as financial
centre?
Increased protectionism in the EU?
Loss of access to EU’s 400+ consumers?
Increased competition from outside EU?
Restrictions on freedom of movement and
access to talent?
Loss of access to key EU FMIs (e.g. Target
2)
Opportunities
Opportunity for bespoke FinTech regulatory
regime and a reduction in regulatory
complexity
Increased global trade with non-EU
countries?
Ability to offer incentives to FinTech sector
(e.g. tax incentives, subsidies etc.)
New immigration system may look
favourably on high-tech talent
London will continue to be a global financial
centre
Increased demand for innovative solutions?
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Questions?
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Linklaters LLP
One Silk Street
London EC2Y 8HQ
Tel: (+44) 20 7456 2000
Fax: (+44) 20 7456 2222
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or
consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its
registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. This document contains confidential and proprietary information. It is provided on condition that its contents are kept confidential and are
not disclosed to any third party without the prior written consent of Linklaters. Please refer to www.linklaters.com/regulation for important information on our regulatory position.
Contact
For further information or questions, please contact our team:
Chetna Patel | Head of Financial Services Latin America |
Department for International Trade |British Consulate-General São Paulo
Tel: +55 11 3094 1883 | E-mail:[email protected]
Tássia Frade | Business Development Manager - Financial Services |
Department for International Trade | British Consulate-General São Paulo
Tel: +55 11 3094 2755 | E-mail: [email protected]
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