FinTech and Blockchain Law Watch – Page 55 – At the Crossroads of Law, Innovation and Commerce

FCA research into the issue of de-risking

Jun 30 2016

In July 2015, the FCA commissioned research into the banking phenomenon known as “de-risking”. De-risking refers to banks removing bank accounts and services from customers or other relationships that they perceive as having higher money laundering (ML) risk. There has been a perception that this process is driven by banks’ concerns about ML and terrorist financing (TF) risks posed by certain types of customer, which have been heightened by large regulatory fines imposed on banks, notably in the United States, for failings in anti-money laundering (AML) processes and breaches of sanctions. The FCA recently published the consultants’ report.

There has been much publicity of the effects of de-risking in the money services business (MSB) and money remittance sector. However, the report shows that the issue affects other businesses as well, including pawnbrokers, fintech companies and charities operating in geographical areas where the perceived ML and TF risk is greater. The report concludes that banks take the issue of de-risking seriously and are mindful of their obligations to treat customers fairly and of the financial inclusion agenda. The banks believe that they are attempting to apply the risk-based approach to financial crime in an even-handed and objective way, given inherent uncertainties about how customers will behave and how regulators and courts will view their own position in relation to misconduct in accounts that they hold. Regardless of the drivers of de-risking, the report confirms that there is no “silver bullet” for the issue. It suggests potential solutions may lie in balancing of costs and risks between banks and high risk sectors and a better developed understanding of how to measure ML and TF risk on a case-by-case basis.

The FCA’s response to the report is to admit that de-risking is a complex issue. It warns that banks should not use AML as an excuse for closing accounts when they are closing them for other reasons. The FCA also warns banks of their obligations under competition law when deciding whether to terminate existing relationships or decline new relationships.

Looking to the future, certain legislation may help some sectors affected by de-risking. From 18 September 2016, the Payment Accounts Regulations (SI 2015/2038) (PARs) will require some banks to offer a payment account with basic features to consumers legally resident in the EU. Also, PSD2 needs to be implemented by 12 January 2018, requiring payment institutions to have access to credit institutions’ payment account services on an objective, non-discriminatory and proportionate basis.

Monetary Authority of Singapore – Consultation on regulatory sandbox for FinTech solutions

Jun 23 2016

By Nicholas Hanna and Penelope Davey

In a move that is targeted at promoting Singapore as a leading FinTech hub in Asia-Pacific, the Monetary Authority of Singapore (MAS), the regulatory authority overseeing financial matters in Singapore, issued a consultation paper on 6 June 2016 which outlined a proposal for a “regulatory sandbox” for FinTech solutions.

The proposal will permit financial institutions and other entities to experiment with new FinTech solutions in an environment of relaxed regulation whilst maintaining appropriate safeguards. It is hoped that this proposed relaxed regulatory environment will allow such solutions to take root without being impeded by regulatory compliance costs and will improve the viability of innovations in the FinTech sector.

Blockchain catches a righteous break and avoids becoming unchained

Jun 15 2016

By Tyler Kirk (ed. Cameron Abbott and Giles Whittaker)

Blockchain is alive and well – one of the greatest threats to blockchain’s success appears to have been seen off with the end of efforts to legislate “exceptional access” to all encryption in the United States. Tyler Kirk explains this in more detail in his article, “Blockchain Catches a Righteous Break and Avoids Becoming Unchained.”

You can read his full article on K&L Gates Hub here.

Regulatory sandbox and innovative regulation

Jun 09 2016

By Daniel Knight

Australian FinTechs are closer to getting a regulatory “sandbox” after the Australian Securities and Investments Commission (ASIC) released its detailed consultation paper this week. The paper details proposals for a testing ground for innovative robo-advice providers and other similar services. It also highlights ASIC’s views about some regulatory options already open to FinTechs under the current law, as we discussed in a previous post.

In a sign of ASIC’s engagement with this nascent sector, ASIC launched its proposals at a fintech startup founders event in Melbourne. ASIC emphasised it is seeking industry feedback and is open to making changes.

EU movement on virtual currencies and distributed ledger technologies

Jun 07 2016

By Jim Bulling and Michelle Chasser

The EU Parliament has called for the creation of a task force to be led by the EU Commission to monitor distributed ledger technologies (DLT) and virtual currencies (VC). The EU Parliament proposed that the task force consist of technical and regulatory experts who will:

provide the necessary expertise to support EU member states’ efforts to monitor DLT;
bring together stakeholders;
foster awareness and analyse the benefits and risks of DLT;
identify best practice standards;
assess existing EU regulation with a view to updating it in response to increased DLT use; and
develop stress tests for widely used VCs and DLT schemes.

The EU Parliament also recommended that the EU Commission revise EU legislation on payments in light of new technological developments with a view to furthering competition and lowering transaction costs possibly by means of promoting a universal and non-proprietary electronic wallet. The EU Commission is currently considering proposals to include VC exchange platforms in the EU Anti-Money Laundering Directive to end the anonymity that has been traditionally associated with such platforms.

This recent regulatory activity in the EU reflects the increased attention that VCs and DLT have been receiving from governments around the world. Australia has recently focused on anti-money laundering and tax implications for VCs and Japan introduced regulations on VC exchanges in March.

Gamification and financial services

Jun 07 2016

By Jim Bulling and Michelle Chasser

How would you use gamification to enhance the mobile and online experience for banking customers? That is the question Barclays Bank is asking developers during its Launchpad Business Challenge. Challenge applicants will have access to Barclays’ sandbox banking data and APIs to pitch their ideas. The Challenge will run for 3 weeks in June with successful applicants’ products being released on Barclays’ Launchpad platform for customers to explore and test.

Gamification involves applying game design elements and principles in non-game contexts and is used to improve user engagement and learning. A simple example of gamification is using a points based quiz to improve financial literacy.

This is not the first time that Barclays has experimented with gamification. In 2010 it released an interactive virtual city game in which players’ characters experienced the consequences of good and bad money management decisions.

Gamification is also a novel way to present important information to consumers in a way that is more approachable than traditional methods. In 2015 the Australian Securities and Investments Commission (ASIC) published a relief instrument which allows regulated disclosure documents such as Product Disclosure Documents and Financial Services Guides be disclosed in innovative ways. The accompanying good practice guidance issued by ASIC in Regulatory Guide 221 stated that disclosure documents can now incorporate a range of digital features including gamification.

Regulatory Guide 221 can be found here.

Brexit: the effect on UK FinTech

Jun 07 2016

By Jonathan Lawrence

On 23 June 2016, the United Kingdom will hold a referendum about whether to remain in or leave the European Union. A British exit from the EU has been labelled a “Brexit”.

A recent Financial News poll has showed that the UK FinTech sector is substantially in favour of staying. Financial News surveyed 118 FinTech professionals to gauge their opinion.

More than two-thirds said Brexit would be detrimental to UK FinTech. However, nearly 18% believe it is still unclear what the long-term impact would be. The remaining 13% think UK FinTech would benefit from a decision to leave the European Union.

Often tech talent is sourced from countries such as Bulgaria, Estonia, Hungary, Romania and Slovenia. The ability to access talent was a major concern of some business people interviewed. The other key potential issue is regulation. There’s a circular debate over whether there would be lighter regulation after the UK left the EU, or whether it would be forced to stay in line with the rest of Europe as a price for continued market access. One theory is that the European market – already smaller than the US – would, in effect, be divided in two. US FinTech firms already have the advantage of addressing a bigger market – partitioning Europe would make this advantage greater still.

More than 84% of those who said Brexit would harm UK FinTech said it would make London less attractive for foreign FinTech companies as a location for their European HQ. However, the largest share believes London would maintain its dominance as a FinTech hub. Asked which European cities would most threaten London, 28% answered “none”, closely followed by Berlin, 25%. Frankfurt came third with 15%.

On the other hand, some 13% said the sector would be better off and 18% were undecided. Of those who believe UK FinTech would benefit, 63% thought it would free up resources that could be reinvested in innovation. Some 58% said Brexit would make it easier for FinTech companies to do business with clients in non-EU countries.

Future of Fintech Regulations in the US

May 20 2016

By Charles Carter and Anthony (Tony) Yerry (ed. Cameron Abbott and Giles Whittaker)

Investment in financial technology (fintech) companies has surpassed US$24 billion worldwide since 2010, which consequently emphasises the importance of the relationship between fintech companies and regulators as they attempt to establish a culture of compliance while not stifling innovation.

As suggested by the industry experts according to The Wall Street Journal, the Office of the Comptroller of the Currency (OCC) may be the best federal agency to regulate fintech companies in the US. On March 31 the OCC during a speech at Harvard University on the innovation of the fintech industry released a white paper which attempts to launch formal discussions between regulators and the industry.

For more information and analysis of the OCC white paper please see K&L Gates’ e-alert here.

AML review targets digital currencies

May 17 2016

By Jim Bulling and Michelle Chasser

The Australian Attorney General’s Department (AG) has released its statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML Act). Recommendations have been made to better incorporate digital wallets and digital currencies in the AML Act.

The AG has recommended that:

the AML Act be amended to ensure that digital wallets are comprehensively captured. Some digital wallets are already caught by the AML Act where they are considered to be ‘accounts’ provided by traditional financial product providers such as banks and credit unions. However, a potential regulatory gap was identified for new types of digital wallets inspired by technological advances. For example, digital wallets which store digital currency are not regulated under the AML Act;

New “FinTech Bridge” between UK and Singaporean FinTech companies and investors

May 17 2016

By Jonathan Lawrence

The UK Government has announced a new “FinTech Bridge” to help UK FinTech firms and investors access the Asian market and expand to Singapore, as well as attracting Singaporean FinTech companies and investors to the UK.

The launch on 11 May 2016 included the signing of a regulatory cooperation agreement between the Financial Conduct Authority (“FCA”) and the Monetary Authority of Singapore (“MAS”). The agreement will enable the regulators to refer FinTech firms to their counterparts across the globe. It also sets out how the regulators plan to share and use information on financial services innovation in their respective markets.