The UK Financial Services Bill: Benefits for fintech scaleups

Updated March 2023

What’s the bill for?

The new UK Financial Services Bill (the Bill) went into UK Parliament on July 20th, 2022 and has now passed successfully through the House of Commons. The purpose of the Bill is to unlock growth and investment across the UK. At Payhawk, we were keen to understand how the Bill would affect startups and scaleups like us. We had the chance to talk to some experts on the matter and summarise some of the main points. The Bill is over 300 pages long, click here to read in full.

As expected, the Bill is extensive and covers many aspects within the financial services sector. The most relevant topic is the revocation of EU policy law and granting UK authorities new powers. The Bill includes a whole new set of regulations for new financial sectors, such as crypto. It also sets the path for the UK to continue to be a global financial hub.

Implementation of the Bill is expected to happen in April 2023 and it is currently progressing through the House of Lords. Experts mention that most of the changes will affect companies indirectly, as it’s based on establishing a new framework in a post-Brexit era. Moreover, once regulators are given new powers, more public consultations will be done. The UK government will revoke EU policy only when the new regulation is live.

Six major changes in the UK Financial Services Bill that will affect UK fintech startups and scaleups

1. Regulators such as the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) will have more power

The change from EU to UK rule-making will translate into regulators having more power. The big question is where these new powers should sit. The main goal is for regulators to have more discretion and control over the standards they impose on financial institutions. Coordination between the government, regulators, and the industry will be key to achieve this goal.

In November 2022, the UK Government withdrew the suggested call-in powers from the Bill. The call-in powers were controversial as they allowed the UK Government to intervene in regulators' decision-making processes. Kennedyslaw says that 'the change of position removes a significant obstacle as the Bill progresses through its legislative journey.'

What does this mean for fintech startups and scaleups?

For businesses, this means that certain laws and regulations that took several months or even years to be approved pre-Bill, could potentially be approved much more quickly.

However, it also means that as regulators are given more autonomy and more power, a higher level of scrutiny will be in place which will create an additional burden for them in answering questions and sharing information.

2. Sandbox as a new financial infrastructure will become a law

Regulatory sandboxes are nothing new for the FCA. In 2018, 18 startups in finance, debt management, insurtech, and blockchain were admitted to “play” in the first FCA regulatory sandbox. To date, the FCA has received more than 500 applicants. Other countries like South Korea and Singapore also use this type of infrastructure to test and develop fintech technologies.

The goal of the sandbox is to adjust adherence to stringent financial regulations to be more aligned with the development and speed of the most creative businesses. But, this must be done carefully to ensure it doesn’t stifle the fintech industry with too many regulations or compromise consumer safety with too few.

In the Bill, the UK Treasury will be able to establish sandboxes via regulations to test the efficiency, effectiveness and transparency of new products for a limited period.

With this initiative, the UK wants to encourage new business models and knowledge-sharing in the fintech sector. The government aims to make it very attractive for new startups to establish themselves in the country. This initiative is aligned with the FCA and PRA’s new secondary growth and competitiveness objectives, which focus on maintaining high regulatory standards. It should also align with international standards to support the competitiveness of the UK economy.

What does this mean for fintech startups and scaleups?

If you’re an early-stage startup whose financial innovation does not fit with today's FCA’s regulatory framework, then you might want to consider the sandbox. You can read more about the actual program here.

3. Rules for stablecoins as a form of payment

Similar to the sandbox program, and with the objective of the UK to remain at the forefront of new technologies and innovations, specific types of stablecoins will be regulated as a form of payment in the UK. The UK has also expressed interest in building cross-border regulation on crypto assets with the US.

Stablecoins are part of Digital Settlement Assets (DSA), as are called such in the Bill. They are defined as a digital representation of value or rights, whether or not cryptographically secured, that can be used for the settlement of payment obligations, can be transferred, stored or traded electronically, and uses technology supporting the recording or storage of data (which may include distributed ledger technology).

The Bank of England will have the responsibility of monitoring these DSA. And the Treasury will ensure the regulations regarding the use of DSA as a form of payment.

The Bill is not very clear on what payment systems will be used, so regulators will need to explain that soon. All G20 countries and major economies will have similar regulations to avoid a global payment crisis.

What does this mean for fintech startups and scaleups?

Fintechs in the crypto sector must follow up closely to see how the different world governments will establish regulations regarding stablecoins and other DSAs. The UK might be one of the first countries to do so. And experts mention that companies using these types of assets in the UK might need to be regulated like Electronic Money Institutions (EMIs) and Payment Institutions (PI) are today. You can read more about FCA’s requirements for EMIs and PIs here.

4. More flexibility for crowdfunding

In the The Financial Services and Markets Act 2000, where today crowdfunding is regulated, investment led crowdfunding requires a prospectus to be published for public offers over €8 million. The new Bill gives the CFA the power to remove this requirement if the offer is made via a regulated platform. The Bill also allows businesses to provide securities offerings to the public.

The FCA will be in charge of deciding what standards of transparency issuers must adhere to. With these changes the UK government wants to support the crowdfunding industry, reducing the cumbersome processes and costs of the offerings but at the same time protecting the investors.

What does it mean for fintech startups and scaleups?

If you’re a crowdfunding startup, this is especially interesting for you. Post-bill-implementation, the FCA could eliminate the threshold of how much funds you can raise via regulated platforms without an FCA-approved prospectus.

5. New regime for critical third party providers

The fear of big tech going into finance is nothing new. Big Tech companies such as Amazon, Google, Facebook, Alibaba, Apple, etc. have an advantage because they already have the customer base and data to provide customised financial services to their customers.

Moreover, another competitive advantage is the network effect, which is when a company uses its platform to keep users engaged in its product ecosystem, partly through the high costs to a consumer of switching to another product or service — either direct costs or because of the hassle of using a new service.

The Bill mentions that these critical third-party providers will be directly regulated by the FCA, PRA, or Bank of England. But, what does it mean to be critical? It's when the service provider poses any risk of failure or disruption to the financial system of the UK, irrespective of where the service provider is located.

Experts mention that the focus of scrutiny will be on the major cloud suppliers that have now entered the financial sector and those companies that support the financial market infrastructure.

The above will be similar to the EU’s policy, the Digital Operational Resilience Act ('DORA'). DORA, which will be voted on in September 2022, is designed to ensure that all participants of the financial system are subject to a common set of standards in order to mitigate ICT risks for their operations.

What does it mean for fintech startups and scaleups?

If you are a service provider, and you might think this new policy could affect you, read more details here. For startups and scaleups, this regulation will diminish operational risks from cloud or any other critical service provider disruption or failure.

6. New financial promotion regime

The Bill will establish the regulatory framework for authorised organisations to approve financial marketing from unlicensed businesses. Authorised companies will be prohibited from endorsing illegal companies' financial promotions and must apply to the FCA to have the restriction lifted in full or in part before they can do so.

Future authorisation applicants for businesses will be able to request approval to allow such financial promotions at that time. The FCA will have the power to impose restrictions on permission, like limiting the kinds of financial promotions a company may accept. The regulator may cancel their license if a business fails to allow any promotions in a given period.

What does it mean for fintech startups and scaleups?

Experts mention that this can be critical for crypto assets companies. The government will need to amend the actual regulation or create a new one to bring qualified crypto assets within the scope of the U.K.'s financial promotion rules. You can read more details about this here.

Conclusion

The UK market is a very attractive one for fintechs and other startups. Firstly, because establishing an entity is a piece of cake, as we explained in our Scaling Up Guide. But also because of the easy and vast access to funds and a more flexible and modern regulation system which seems to be the perfect ground for fintechs to thrive.

Like with most initiatives, there will be pros and cons related to this Bill (if and when it passes). As a fintech startup you will no doubt consider all of the issues very carefully before committing to any new actions initiated by the Bill. In the meantime, there are plenty of things you can do to keep your financial operations slick, streamlined, and focused on growth — starting with spend management.

Book a demo to discover how to spend less time on manual finance tasks and more time on optimising budgets with clear spend visibility and control.

Disclaimer

The information provided in this article does not, and is not intended to, constitute legal, financial and/or tax advice from Payhawk. All information and content available in this article is for indicative general informational purposes only and no action should be taken in reliance on it without specific legal advice. The information may not reflect the most current legal developments. Readers of this article should consult with a qualified expert to obtain advice with respect to any particular legal, financial and/or tax matter. No reader of this paper should act or refrain from acting on the basis of information contained herein without first seeking legal, financial and/or tax advice from an appropriate counsel in the relevant jurisdiction. Payhawk disclaims all liability in respect to actions taken or not taken based on any or all of the contents of this paper to the fullest extent permitted by law.

References

UK Gov., Pinset Mansons, IFLR,EY UK,AIMA,FCA, Baker Botts, Shearman