Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook for May 2024 – Osborne Clarke

BoE speech on modernizing UK payments

On 15 April 2024, the Bank of England (BoE) published a speech by Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England, outlining how the Bank of England is committed to ensuring trust and supporting innovation, both as a supplier and as retail and wholesale money regulator supplier. Ms. Breeden also discussed the key threats and opportunities facing central banks and the private sector.

Key highlights of the BoE’s work on innovation included:

• Stablecoin regulation. Ms Breeden refers to the BoE’s November 2023 discussion paper proposing a regulatory regime for stablecoins in retail payments (see this issue ‘Regulatory Outlook’), which focused on ensuring that stablecoins and their associated systems will be as secure as those currently used in retail payments. The BoE received valuable feedback from a range of stakeholders in the cryptocurrency, payments and banking sectors. These included several respondents who argued that the requirements proposed by the Bank of England pose a challenge to the business models of stablecoin issuers and could therefore effectively ban the use of stablecoins on a systemic scale. The BoE will consider all views received and will then consult on the draft rulebook.
• Potential retail central bank digital currency (CBDC). The BoE has not yet made a decision on the issuance of a digital pound. Its work over the next two years or so will focus on making a robust and objective assessment of potential benefits and costs, including operational and technical feasibility. To this end, the BoE will consider a potential digital pound project in more detail, building on technology experiments and proofs of concept with the private sector.
• Greater focus on wholesale innovation. The Bank of England is increasingly focusing on wholesale innovation, including how best to develop its infrastructure to support the settlement of tokenized transactions to ensure the continued role of central bank money in wholesale payments. The Bank of England is exploring the benefits of expanding its real-time gross settlement (RTGS) system in the future to offer synchronized settlements across assets, by combining the traditional centralized RTGS ledger with other ledgers, including those using distributed ledger technology.
• Payment innovations from banks. The BoE wants to encourage banks to think and act more in this space. This includes both how tokenization could be applied to bank deposits to enhance their functionality across the full range of retail payments use cases, and what interbank payment rails would be needed to do so.
• The next document for discussion. The BoE intends to publish a discussion paper this summer on wholesale payments innovation and bank payments innovation.

FCA statement on potential competition impacts arising from data asymmetries between Big Tech and financial services firms

Welcome to the Competition section.

Treasury Committee Report on the Findings of the SME Finance Inquiry

On 8 May 2024, the House of Commons Treasury Committee published a report on the findings of the inquiry into access to finance for small and medium-sized enterprises (SMEs) – as of 2023, there were over 5.55 million SMEs in the UK, compared with approximately 8,000 large enterprises.

The committee found that SME confidence in access to finance had declined and business loan approval rates had fallen significantly. In addition, the Committee observed increasing levels of “debanking” (closing bank accounts) and ineffective ways of resolving disputes with banks.

The report made the following recommendations:

• The introduction of new Basel 3.1 standards by the Prudential Regulation Authority threatens to make conditions for SMEs even more stringent. Any more stringent capital requirements for SMEs should be abandoned.
• The Government must find a way to support the 55,000 SMEs currently served by the Business Banking Resolution Service (BBRS). The Committee considers that BBRS is ineffective, is perceived as lacking independence and should be closed as planned. However, SMEs exceeding the turnover thresholds set by the Financial Ombudsman Service (FOS) will need to be able to complain about their bank treatment, and consultation on the new mechanism should take place by the end of 2024.
• The FCA should provide clearer guidance on the application of the ‘risk appetite’ and ‘reputational risk’ criteria – banks should not be able to use risk appetite assessments to close accounts.
• The government must carry out annual reviews of the performance of the British Business Bank (BBB). It was found that the organization plays an important and positive role in providing SMEs with debt and equity solutions, but awareness of BBB and its programs is too low.
• The FCA must use the announced review and existing powers to strengthen rules on the misuse of personal guarantees and give the FOS powers to deal with related business complaints.

The number of complaints about banking withdrawals is rising in figures published by the Treasury Committee

On 21 April 2024, the House of Commons Treasury Committee published a press release and correspondence regarding complaints about the bank’s delisting.

The figures were set out in a letter sent to the Commission by Abby Thomas, chief executive of FOS. The press release highlighted key points from the data presented, including the following:

• The number of complaints received by the FOS relating to debanking has increased by 69% since the 2020/21 financial year;
• There has been an increase in the proportion of complaints upheld by the FOS: in the last year 36% found in the complainant’s favor compared to 27% or less in each of the previous three years; AND
• The number of complaints related to the closure of escrow accounts has almost tripled since 2020-2021 – this includes cases that involve financial crime, money laundering or where the complaint involves a politically exposed person.

Ms Thomas explains that the increases may be due to changes in banks’ processes and behaviour, but are also likely to be the result of media attention on the issue.