FinTech Monthly Bulletin: August 2020

If you have any queries or would like to subscribe to the FinTech Monthly Bulletin, please contact Angus McLean

1. General

1.1. This month a series of consultations and reports were released to map out how the UK and many countries around the world will embrace a new digital culture as a side effect of the COVID-19 pandemic. It is clear that now, in light of recent developments, the FinTech sector is increasingly high up on the agenda of regulators and supranational bodies.

1.2. The Financial Conduct Authority (FCA) has issued a press release providing details of the 22 firms that were successful in applying to begin testing in the sixth cohort of the regulatory sandbox. The propositions in the cohort support what the FCA believes is the increased demand for digital offerings created by the impact of COVID-19 including to "make finance work for everyone" and "support the UK in the move to a greener economy". (23 July 2020)

1.3. The International Banking Federation (IBFed) and Oliver Wyman have released a joint report named "Big banks, bigger techs?." This report discusses how technology and regulation are impacting financial services and the growth of FinTechs and BigTechs. The report identifies three areas where policy makers could consider action to regulate the evolution of the market:

• revising the measures within financial regulation, for example by defining the criteria used to asses which new products and services need inclusion in the regulated perimeter or agreeing on a common taxonomy;

• strengthening policy response on themes that cut across industries by ensuring closer cooperation and coherence of the rulebooks enforced in finance, competition, financial stability and data protection; and

• extending finance-specific regulations to other industries where inconsistencies in regulation and enforcement have emerged such as in consumer protection and corporate governance. (23 July 2020)

1.4. The Prudential Regulatory Authority (PRA) has released a consultation paper setting out its proposed approach to supervising new and growing non-systemic UK banks. The purpose of the proposal is to:

• help new banks understand how and why PRA expectations increase as they grow;

• clarify the expectations on new and growing banks as they mature;

• clarify that in competitive environment it is normal to see both the entry and exit of banks; and

• communicate the PRA's aim for banks to have positive regulatory relationships through open, constructive, and forward-looking communication. (22 July 2020)

1.5. HM Treasury has published a press release announcing that it has launched an independent FinTech Strategic Review, which will establish priority areas for industry, policy makers, and regulators to explore how to support the ongoing success of the UK FinTech sector. (20 July 2020)

1.6. The City of London Corporation has published a report on UK cross-border trade in financial services with Australia. This report discusses, amongst other things, the UK-Australia FinTech Bridge and sandbox that has been useful for small FinTech firms but could benefit from a scaling up programme and a defined pathway out of the sandbox particularly when applying for a licence. (15 July 2020)

1.7. The European Commission (Commission) and the World Bank Group has signed a Financial Framework Partnership Agreement which guides terms under which the Bank Group will use funding from the European Union to implement development projects across the world. This will include encouraging economic growth and digital development as well as providing support to small and medium businesses in emerging economies. (8 July 2020)

1.8. The European Central Bank has issued a blog discussing the "new normal" for the banking sector. Following the shock of COVID-19, the ECB predicts that digitalisation with become an integral part of banks' business models. (7 July 2020)

1.9. The Commission  has announced that it has delivered on its pledge to mobilise €500 billion in investments under the Investment Plan for Europe. The European Fund for Strategic Investments (EFSI) allows the European Investment Bank Group to finance riskier investments and has approved operations that will benefit some 1.4 million small and mid-sized companies. (2 July 2020)

1.10. The FCA has published a policy statement on final regulated fees and levies for 2020/21 where it confirmed that it will freeze minimum fees and implement a 2-month extension period for payment of fees for medium and small firms such as FinTechs.(2 July 2020)

1.11. The International Monetary Fund (IMF) has issued a blog about digital financial inclusion during the time of COVID-19. This blog details how the pandemic has become a game changer for FinTechs as low-income households and small firms can benefit greatly from their services. When discussing the tasks ahead the blog notes the need for:

•  greater financial and digital literacy;

• regulators to keep up with fast-paced technological changes to ensure data protection, cybersecurity and interoperability across borders;

• accelerating the creation of governance frameworks for big FinTech companies;

•  more "coders"; and

• closing the digital divide across and within countries to reap the benefits of digital financial services. (1 July 2020)

2. Artificial Intelligence and Automation

2.1. The Information Commissioner's Office (ICO) has issued a blog with guidance on artificial intelligence (AI)  and data protection. It discusses, among other things, the relationship between AI and data protection. (30 July 2020)

2.2. The World Intellectual Property Office (WIPO) has held a three-day convention to discuss how the intellectual property (IP) community should address the development of AI and its impact on various aspects of IP law and policy, and whether new IP laws or guidelines are required. You can find a summary of these conversations on the Insights pages of our website. (22 July 2020)

2.3. The European Council (Council) has published the discussion from the 15th Summit between India and the European Union (EU) where leaders discussed ways to enhance their dialogue and cooperation on technology by engaging in 5G and AI including to promote global standards and to foster their safe and ethical deployment. (15 July 2020)

2.4. The Chinese's  government has released data to suggest that the number of enterprises with business related to AI went up by more than 31% in the first half of 2020 with more than 140,000 AI enterprises registered in that period. (13 July 2020)

3. Cryptoassets

3.1. The FCA has published a handbook notice containing an Enforcement (Fifth Money Laundering Directive) Instrument  2020 which makes changes to the Handbook to extend the FCA's existing investigative and sanctioning powers under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to cryptoasset exchange providers and custodian wallet providers. (24 July 2020)

3.2. The Financial Stability Board (FSB) has released the list of public responses to its consultation on addressing the regulatory, supervisory and oversight challenges raised by "global stablecoin" arrangements. The FSB expects to publish a summary of findings and final recommendations in October 2020. (24 July 2020)

3.3. The IMF has released a speech by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, concerning public-private partnerships for digital payments and to provide a central bank digital currency (CBDC). The models for this CBDC supports customer interaction being left to the private sector and charging central banks with regulation and supervision. The speech highlights issues including:

• interoperability of coins;

• concerns around the bundling of coins with social media providers leading to unfair competition; and

• payment system instability. (22 July 2020)

3.4. The UK government has published consultation papers regarding its proposals to strengthen protections against misleading and inadequate promotion of financial products and cryptoassets. The two consultations propose both increasing the oversight of financial promotions issued by unauthorised firms and bringing the promotion of certain types of cryptoassets under FCA regulation for the first time. Please read more information from our recent insights article here. (20 July 2020)

3.5. The Financial Action Task Force (FATF) has published its report to the G20 on its view on the "so-called" stable coins and addresses the following:

• what the characteristics of stablecoins are;

• what the money laundering and terrorist financing risks of the stablecoins are; and

• how the FATF plans to enhance the global anti-money laundering and counter-terrorism financing framework for virtual assets and stable coins.

The FATF has also issued a review of the implementation of its revised Standards on virtual assets and virtual asset providers.  (7 July 2020)

4. Cybersecurity

4.1. HM Treasury and the Monetary Authority of Singapore (MAS) have published a joint note following the fifth UK-Singapore financial dialogue. Amongst other topics, the bodies discussed cybersecurity and ongoing discussions to conclude a MOU by the end of 2020 to enhance collaboration in that area. The bodies also discussed the importance of cross-border data flows to ensure financial institutions can transmit financial data across jurisdictions seamlessly. (20 July 2020)

4.2. The National Cyber Security Centre (NCSC) has revised its advice on managing High Risk Vendors (HRVs) within UK telecommunications networks following the announcement of additional US sanctions in relation to a high profile vendor. (14 July 2020)

4.3. The NCSC has launched a new exercise helping small businesses test their cyber resilience while staff work remotely. The 'Home and Remote Working' exercise will form part of a series in the highly successful Exercise in a Box toolkit since the coronavirus outbreak. (13 July 2020)

4.4. The Commission has launched a consultation on the revision of the EU Cybersecurity Directive. You can find a summary and the reason behind the Commission's decision to review on the Insights pages of our website. (7 July 2020)

4.5. See also paragraph 1.11.

5. Data

5.1. Data protection and privacy authorities have published an open letter to video teleconferencing companies reminding them of their obligations to handle personal data responsibly. This is due to a sharp increase in the use of video teleconferencing for both social and business purposes as a result of COVID-19, which can involve the sharing of particularly sensitive information.(21 July 2020)

5.2. Centre for Data Ethics and Innovation (CDEI) has published its first report on public sector data sharing. The report, among other things, explores barriers to data sharing and focuses on addressing citizen trust. (20 July 2020)

5.3. The ICO has launched an online toolkit due to an increasing number of requests of Freedom of Information (FOI) as organisations prepare to recover from the COVID-19 pandemic. (17 July 2020)

5.4. The Court of Justice of the European Union (CJEU) has confirmed how EU standards of data protection must travel with data when it is transferred overseas, which means this judgment has wider implications than just the invalidation of the EU-US Privacy Shield. It is a judgment that confirms the importance of safeguards for personal data transferred out of the UK. (16 July 2020)

5.5. See also paragraphs 1.3, 1.11, 2.1, 4.1 and 7.2.

6. InsurTech

6.1. The European Insurance and Occupational Pensions Authority (EIOPA) has published the opening remarks of its Chairman, Gabriel Bernadino, from the Meeting of the European Forum for Innovation Facilitators. Mr Bernadino provided examples of the digitalisation of the insurance sector since the COVID-19 pandemic hit and the risks that have arisen as the InsurTech industry develops such as issues linked to fairness and consumers at risk of bias or exclusion. (3 July 2020)

7. Payments and Open Banking

7.1. The Payments System Regulator (PSR) has developed its first ever future strategy to define clear outcomes that it wants to see in the payments sector. The PSR has broken down its planned engagement into three key themes that will no doubt be of interest to FinTech businesses:

• innovation and future payment methods: to make the payment industry agile and innovative so that consumers can access the payments methods that work for them (more information has been published here).

• competition: effective competition at all levels of the supply chain to protect people and businesses, with detailed economic regulation acting where competition is not enough.

• choice and availability of payment methods: meaning that all people and businesses should be able to make the payments they want to make. (29 July 2020)

7.2. The Committee on Payments and Market Infrastructures (CPMI) has issued a stage 2 report for the G20 on "Enhancing cross-border payments: building blocks of a global roadmap". The Financial Stability Board published a letter to the G20 supporting the report. The report forms part of a three-stage process to develop a roadmap to enhance cross-border payments. The report is grouped into five focus areas of building blocks which address the frictions identified by the stage 1 report:

• committing a joint public and private sector vision to enhance cross-border payments.

• co-ordinating on regulatory, supervisory and oversight frameworks.

• improving existing payment infrastructures and arrangements to support the requirements of the cross-border payments market.

• increasing data quality and straight through processing by enhancing data and market practices.

• exploring the potential role of new payment infrastructures and arrangements. (13 July 2020)

7.3. The FCA has released finalised temporary guidance for payment and e-money firms in  light of COVID-19 around strengthening prudential risk management and safeguarding customer's funds during this period of economic stress and uncertainty. (9 July 2020)

7.4. The FCA has published a "Portfolio Strategy" letter from the Director of Retail Banking and Payments Supervision addressed to CEOs of payment services firms highlighting areas where it believes there may be non-compliance with the Payment Services Regulations 2017, the Electronic Money Regulations 2011 and the FCA's Principles for Business. Areas covered include:

• firms safeguarding arrangements for customer funds;

• the management of prudential risks;

• the management of financial crime risks;

• firms' financial promotions and consumer communications;

• firms' governance and oversight of their regulated processes; and

• firms' record keeping and regulatory reporting. (9 July 2020)

7.5. HM Treasury has published a call for evidence on the payments landscape which notes how payments have become a focus for FinTech developments through use of mobile apps that provide greater convenience and security for consumers. (July 2020)

7.6. See also paragraphs 1.10 and 3.3.

8. Peer to Peer Lending and Crowd Funding

The Commission has published a communication of the Council of the European Union's adoption at first reading of proposed Regulation on European Crowdfunding Service Providers (ECSPs) for business, and proposed Directive, which makes consequential amendments to MiFID II in relation to crowdfunding. If adopted, the new Regulation is intended to remove barriers for crowdfunding platforms providing cross-border services by harmonising the minimum requirements when operating in their home market and other EU countries.  The Commission's publication follows the European Council's announcement that it had adopted the new rules at first reading. (29 July 2020)

9. Other

9.1. China has launched its first e-seal application platform based on blockchain technology, with the aim of boosting security and convenience for enterprises. (21 July 2020)

9.2. Hong Kong has launched HK$120 million subsidy plan to encourage companies to hire 1,000 FinTech professionals over the next 12 months. (1 July 2020)

9.3. The Financial Services Consumer Panel (FSCP) has released a discussion paper on digital advertising in financial services. The FSCP expresses concern about the consumer harm linked to digital advertising of financial services and the use of AdTech to create detailed profiles of individual consumers. (July 2020)

About Simmons & Simmons’ FinTech team

The FinTech Monthly Bulletin is prepared by the FinTech team of Simmons & Simmons.

Since its emergence into the mainstream, the FinTech sector has captured the interest and imagination of entrepreneurs, investors, governments and regulators, not to mention financial institutions and asset managers. We understand the opportunities and challenges that lie at the heart of the FinTech revolution and advise clients navigating the novel legal and regulatory issues that frequently arise.

Our market leading FinTech team combines specialist expertise across practices and offices with insights resulting from a focus on the TMT, Financial Institutions, and Asset Management and Investment Funds sectors.

Our clients range from early stage start-ups to some of the world’s largest financial institutions and technology providers. We also advise clients partnering with or investing in FinTech firms as well as financial institutions and asset managers developing their own FinTech solutions.

We support clients across a broad range of FinTech matters including crowdfunding, payments, cryptoassets, distributed ledger technology, InsurTech and RegTech, and we are interested in all areas of financial technology innovation.

If you would like to find out more about our FinTech team or require advice on a FinTech matter, please contact one of our lawyers at this link or your usual Simmons & Simmons contact.