Balancing Innovation with Regulation: FinTech Laws to Come in 2021

11 February 2021

Despite the volatile economic landscape that has plagued businesses even before 2020, FinTech continues to spearhead innovation in financial services. New platforms and tools built on the back of advancement in distributed ledger technology and AI continue to push the boundaries of the traditional banking industry. However, with innovation comes regulation and the need to educate consumers on the new platforms and the risks associated – namely, cybersecurity, fraud and scams.

For fledgling start-ups and fast-growing FinTech’s, keeping on the right side of the regulators is the key to earning trust with new customers. As we have seen in other sectors, the race between technological advancement and policy tends to see tech forge ahead, leaving consumers to adopt digital products and services with little in the way of a regulatory roadmap holding providers to account.

While the emergence of fintech saw the creation of regulatory sandboxes that served as testing grounds for new business models that weren’t protected by current regulation, the pace at which technology is moving will inevitably require fresh rules to be established – ones that can truly govern the new age of financial services.

Below, we look at the potential regulations we can expect to see for FinTech in 2021.

Increasing consumer protection in digital banking

The onset of COVID-19 and the initial restrictions placed in the first lockdown saw the closure of offices and bank branches across the country. This has coincided with the dramatic rise of FinTech’s, and neobanks in particular. Almost three years on since the introduction of the PSD2 or ‘Open Banking’ framework, the popularity of digital banks has surged, attracting over $2bn in venture capital globally in 2020 alone.

Now, a recent survey has found that 66% of people were regularly using financial technology between March and July 2020, an increase of over 50% compared to 2019. For this period of time, customers grew increasingly reliable upon digital solutions, turning to FinTechs to help them manage their money during the first national lockdown. With the growing use of FinTech services has come a focus on those in society reliant on bricks and mortar banks. Inevitably, regulators will want to protect those unfamiliar with digital banks and help to educate them on the risks involved with some of these products.

While a sharp rise in adoption of neobanks is clear, one of the greatest barriers to the adoption of open banking is a lack of trust. Increased regulation seems the obvious route to removing this hurdle and protecting consumer interests. Already, we observed the long-anticipated $5.3bn Visa/Plaid deal fall through after the U.S’ Department of Justice pushed back on the blockbuster merger, serving both businesses a lawsuit citing an unfair monopoly in the market.

On the issue of consumer protection, Philip Rowan, lead, regulatory innovation, Cambridge Centre For Alternative Finance, says: “Covid-19 has been catalytic in pushing fintech up the agenda for regulators and is affecting regulatory approaches, practices and processes.
“The increasing digitalisation of financial services will require parallel innovation and transformation in financial regulation and supervision, encompassing not only technology but also changes in mindset and culture.”

Tightening the rules around ‘Buy Now Pay Later’

Talking of consumer protection, the last few years has seen a sharp rise in the use of Buy Now, Pay Later (BNPL) services such as Klarna, whereby shoppers can make purchases and split the payment without paying interest. In 2020 alone, BNPL services were used by five million people in the UK for a total amount of £2.7bn. This unprecedented rise in BNPL has left many calling for stricter rules to prevent users from racking up debt.

In response, Capital One became the first major US bank to block BNPL transactions, describing such services as “risky for customers and the banks that serve them.” Meanwhile, the Advertising Standards Agency called Klarna’s ads “irresponsible” for linking the company with “lifting or boosting mood.”

In their review recommending regulation, the Financial Conduct Authority called for the Government to work with the FCA to make amendments to existing legislation as soon as possible and ensure BNPL products are regulated as soon as possible. On the matter of tightening the rules around BNPL, Economic Secretary to the Treasury John Glen said: “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”

However, while the FCA is currently looking into BNPL as part of its inquiry into unsecured credit, MPs have warned that any new regulations would likely take as long as 18 months to roll out. Then, on the 13th January, MPs rejected an amendment to the Financial Services Bill that would attempt to force through regulations within three months. Despite this setback, it’s clear that such the appetite for tighter rules in this area exists, and businesses offering such services should keep a close eye on amendments that may restrict how they market their products.

Open banking in a post-Brexit Britain

In the UK, the OBIE designs the standards for secure APIs and ensures the effective implementation of open banking nationwide. Since the UK has now left the EU, the country is no longer bound by the PSD2. While considerable deviation from the EU seems unlikely, it may decide that its status as a leader in Open Banking will allow it to alter security standards – especially considering recent advancements in biometric security systems like facial recognition.

As the UK charts its open banking course outside of the EU, the government should seek to set out clearer guidelines on replacing the EU’s certification regime. The FCA has warned that in light of Brexit, financial companies won’t be able to use the EU’s certification standard to share customer data after June 2021. If FinTechs are to avoid the disruption, more guidance is needed from bodies like the OBIE.

PSD2 isn’t the only change in a post-Brexit Britain. Some of the major players in the UK fintech landscape had been taking advantage of the EU Passporting channels to operate in Europe, with Revolut being the most notable to have used the scheme. As of January 1st, this passporting scheme as a means of operating in the UK is no longer available. In the early days of negotiations, the FCA suggested that firms using the scheme to operate in the UK could do so until they received proper FCA authorisation. However, considering the UK FinTech sector is one of the strongest in the world and there are a number of high-profile FinTechs benefiting from the scheme, it’s more than likely that a similar scheme will be just around the corner.

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