FinTech Matters - January 2025

Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2025 published

On 9 January 2025, the Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2025 (SI 2025/17) (Order) was published on legislation.gov.uk, with an explanatory memorandum.

The Order amends the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (the CIS Order) by adding a new paragraph specifying that qualifying cryptoasset staking does not constitute a collective investment scheme (CIS) as defined in section 235 of the Financial Services and Markets Act 2000 (FSMA). The new paragraph 22 specifies that qualifying cryptoasset staking arrangements are not a CIS, with "qualifying cryptoasset" defined under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO). This provides certainty for firms offering staking services to UK customers, ensuring they are not subject to CIS rules. Consumer protection remains in place through compliance with the FPO and relevant FCA rules and guidance. 

The Order was made on 8 January 2025 and comes into force on 31 January 2025.

HM Treasury addressed this issue in its February 2024 consultation paper on the future financial services regulatory regime for cryptoassets and its subsequent response (see our November 2023 update). In November 2024, it confirmed plans to remove legal uncertainty about whether cryptoasset staking services are considered a CIS under financial services law (see our December 2024 update). The uncertainty arose because cryptoasset staking services, in some cases, appear to satisfy some or all of the elements of the CIS definition in section 235 of FSMA.

FCA discussion paper on admissions, disclosures and market abuse regime for cryptoassets

On 16 December 2024, the FCA published a discussion paper (DP24/4) outlining its proposed approach to cryptoasset admissions and disclosures (A&D), and the market abuse regime for cryptoassets (MARC). The paper aims to balance addressing market risks with fostering growth. Key objectives include:

• improving regulatory clarity for firms and consumers

• ensuring consumers have the necessary information before buying or selling cryptoassets

• requiring controls and processes for fair and orderly trading conditions

• further reducing risks of money laundering and losses to fraud.

Chapter 2 of DP24/4 outline proposals for the future cryptoasset A&D regime, including disclosure requirements for issuers or offerors when admitting cryptoassets to trading platforms. The proposal aligns with the reformed prospectus regime under consultation, with adaptations for cryptoasset characteristics. The FCA considered IOSCO recommendations in developing these proposals.

Chapter 3 discusses a framework and approach for preventing, detecting and disrupting cryptoasset market abuse. The MARC will be based on the UK Market Abuse Regulation (596/2014) and adapted for cryptoassets.

Comments can be made on DP24/4 until 14 March 2025. The FCA seeks feedback from domestic and international stakeholders, particularly those in the wholesale sector, to understand the impact of its proposals on business models and market costs. The FCA will consider feedback, engage further with the industry, and consult on proposals it decides to move forward with.

DP24/4 reflects insights gained from FCA-led crypto roundtables held with the industry earlier in 2024. It is the first in a series of FCA papers, as noted in an FCA statement and set out in its recent crypto roadmap (see our December 2024 update).

PRA data request on firms' cryptoasset exposures

On 12 December 2024, the PRA published a data request, in the form of a questionnaire, on firms' exposures to tokenised assets, stablecoins and other cryptoassets.

The PRA's press release, the PRA explains that it is gathering information of firms' current and expected future cryptoasset exposures and their application of the Basel framework for the prudential treatment of cryptoassets. This will help the PRA and the Bank of England to:

• calibrate the prudential treatment of cryptoasset exposures

• analyse the relative costs and benefits of different policy options

• monitor financial stability implications with updated views on firms’ cryptoasset activities.

Firms should complete the questionnaire at the highest-level of UK consolidation to the extent it is relevant to their business, exposures or activities. If there are no relevant cryptoasset exposures or activities, there is no need to submit a "nil return". Firms should only complete applicable sections.

Completed questionnaires are due by 24 March 2025.

European Commission asks EBA and ESMA to consider MiCA and PSD2 overlap 

On 10 December 2024, the EBA published correspondence with the European Commission on the interplay between the Regulation on markets in cryptoassets (MiCA) and the revised Payment Services Directive (PSD2).

The Commission's letter (dated 6 December 2024) was sent to the EBA and ESMA. It highlights the overlap between cryptoasset services provided by cryptoasset service providers (CASPs) under MiCA and payment services regulated under PSD2. Specifically, e-money tokens (EMTs) are classified as electronic money under Article 48(2) of MiCA. As a result, EMTs fall within the definition of "funds" set out in Article 4(25) of PSD2. This dual nature of EMTs means they are regulated both as cryptoassets under MiCA and electronic money under PSD2.

The Commission notes varying interpretations across EU member states regarding the interaction between MiCA and PSD2.

EMT treatment is being discussed in the ongoing PSD2 revision (through PSD3 and new Payment Services Regulation (PSR)). However, the Commission advises that any changes will take years to implement, so solutions are needed for the interim.

The Commission has asked the EBA (in co-ordination with ESMA) to consider issuing an opinion (that is, a "no action letter") to clarify enforcement of PSD2’s authorisation requirements for CASPs offering EMTs. This would apply until the application date of the reformed PSD2.

The Commission also seeks suggestions on streamlining the PSD2 authorisation process to ease the operational burden on institutions where dual authorisation is required. Further, it requests suggestions on potential legislative changes to address these issues in the ongoing PSD2 reform discussions.

In a letter (dated 10 December 2024) responding to the Commission, the EBA agrees with these concerns and is assessing options in co-ordination with ESMA. The EBA aims to publish a response by April 2025.

MiCA update

The following MiCA-related developments have occurred:

• On 18 December 2024, the European Commission adopted the Delegated Regulation relating to regulatory technical standards (RTS) specifying the detailed content of the information necessary to carry out the assessment of a proposed acquisition of a qualifying holding in an issuer of an asset-referenced token (ART). The Delegated Regulation reflects a mandate in Article 42(4) of MiCA.

• On 18 December 2024, the European Commission adopted the Delegated Regulation relating to RTS specifying the detailed content of information necessary to carry out the assessment of a proposed acquisition of a qualifying holding in a cryptoasset service provider (CASP). The Delegated Regulation reflects a mandate in Article 84(4) of MiCA.

• On 18 December 2024, the EBA published its final report on guidelines on reporting templates under Article 97(1) MiCA.

• On 13 December 2024, the European Commission adopted a Delegated Regulation specifying RTS for ART and e-money tokens, adjusting own funds requirements and stress testing for issuers. The Delegated Regulation was made under Article 36(6) of MiCA.

• On 10 December 2024, the ESAs (EBA, ESMA, and EIOPA) published a final report on guidelines for explanations, opinions, and a standardised test for classifying cryptoassets under MiCA. 

• On 4 December 2024, ESMA published a webpage with the official translations, including the English version, of the joint ESMA and EBA guidelines on suitability assessments under MiCA.

Bank of England, FCA, PRA and PSR conduct 2024 review of Memorandum of Understanding for payment systems in the UK

On 20 December 2024, the Bank of England (BoE), FCA, Prudential Regulation Authority (PRA), and the Payment Systems Regulator (PSR) published a statement on the 2024 review of their Memorandum of Understanding (MoU). The MoU outlines a high-level framework on how they co-operate on UK payment systems. The Financial Services (Banking Reform) Act 2013 requires an annual review of the MoU.

Senior representatives from these authorities reviewed the past year's co-operation, recognising progress in expertise and data sharing but also identifying areas for improvement. They are committed to revising the MoU by Q2 2025 to align with the Government’s National Payments Vision (NPV), published in November 2024.

The NPV includes recommendations for UK payments, through a joint remit letter to the FCA and PSR. All four authorities emphasise the importance of continued collaboration and co-operation amidst ongoing innovation and changes in the payments sector.

Bank of England speech provides update on future roadmap for Real-Time Gross Settlement service

On 16 December 2024, the Bank of England (BoE) published a speech by Victoria Cleland, its Executive Director for Banking, Payments and Innovation given on 5 December 2024.

The speech outlines the BoE's approach to innovation in money and payments, focusing on its work to ensure its wholesale infrastructure meet evolving industry needs. The speech also presented the BoE's future roadmap for the Real-Time Gross Settlement (RTGS) service.

The roadmap aims to support innovation in key areas and sets out the BoE's plan to continuously evolve RTGS through building on the foundations laid by upgrading its core ledger and settlement engine. Three key priorities were highlighted, shaped by industry input:

• Wider access to RTGS: the BoE is extending settlement accounts to more and diverse firms to improve accessibility and ensure the utility of technology.

• Extending RTGS settlement hours: the accessibility of central bank money depends on the hours of operation of the RTGS service. The BoE supports a phased transition to extended RTGS settlement hours, with a consultation paper planned for 2025.

• Fostering wholesale settlement innovation through synchronisation: the BoE is developing conditional settlement for diverse asset transactions, introducing the role of a "synchronisation operator," with industry consultations continuing in 2025.

PSR final report on market review into cross-border interchange fees

On 13 December 2024, the Payment Systems Regulator (PSR) published its final report in its market review into UK-EEA consumer cross-border interchange fees (IFs) (MR22/2.7).

The PSR launched the market review due to concerns about increases in these IFs. Following Brexit, Visa and Mastercard IFs for UK-EEA remote "card not present" (CNP) transactions rose from 0.2% to 1.15% for debit cards, and from 0.3% to 1.5% for credit cards. The PSR sought to understand the rationale and impact of these increases and whether they were an indication that aspects of the market are not working well.

The PSR found Visa and Mastercard were not subject to effective competitive constraints on the acquiring side of the network, allowing them to raise IFs higher than if effective competitive constraint had been present.

The PS concluded that merchants and acquirers could not counteract the increased IFs, which allowed Visa and Mastercard to raise fees without facing significant resistance. The card schemes did not conduct specific assessments when increasing outbound IFs. Instead, they adopted rates set by the European Commission for transactions between the European Economic Area (EEA) and the rest of the world—rates that are not relevant to the UK-EEA context.

The PSR concluded that the increases were unjustified, costing users £150 million to £200 million annually, with no evidence that they improved payment quality. It concluded that the increases of the relevant IFs result from the market not functioning properly, and recommended regulatory intervention, proposing a price cap on outbound UK-EEA IFs. The PSR is consulting on an interim price cap while further analysis is conducted.

Independent review of Payment and Electronic Money Institution Insolvency Regulations 2021

On 12 December 2024, HM Treasury announced the initiation of an independent review of the Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) (PEMI Regulations 2021). These regulations were introduced to provide special administration regimes for payment institutions and electronic money institutions. As the legislation enters its fourth year, HM Treasury has initiated an independent review of their market impact.

The review will determine whether the system is meeting its stated objectives (set out in regulation 12 of the PEMI Regulations 2021 and section 233(3) of the Banking Act 2009). These aim to improve returns to consumer creditors and speed up the insolvency process when compared to administrations conducted under the Insolvency Act 1986. It will also assess the co-operation between HM Treasury, the Bank of England, the FCA and the Insolvency Service.

Since its introduction, the PEMI Regulations 2021 has been used for small to medium-sized institution but remain untested on larger firms. The review will examine whether prioritising customer fund returns over service continuity is appropriate for large-scale institutions.

The final report, due by the end of 2025, will assist the government in determining the future of the regime. Evidence submissions are accepted until 30 May 2025.

Application for permission to appeal High Court's decision to strike out APP fraud claims against receiving payment service provider refused

On 10 December 2024, the Court of Appeal updated a webpage on its case tracker for civil appeals in relation to an application for permission to appeal against the decision of the High Court in Larsson v Revolut Ltd [2024] EWHC 1287 (Ch).

The application (case reference: CA-2024-002228) was made from an order by Zacaroli J dated 12 September 2024. The decision given on 10 December 2024 refused permission to appeal.

In Larsson, the court allowed the partial strikeout of claims brought against Revolut Ltd, the electronic money institution, as the receiving payment service provider (PSP) in the context of an authorised push payment (APP) fraud. On the facts, the court:

• found no basis for imposing the contractual duties advocated by the claimant

• accepted no general duty of care is owed to a third-party payer/victim of APP fraud when processing payments

• rejected the claimant's attempt to impose a duty of care on the PSP simply because the claimant was also a customer of the PSP, noting that there was no principled reason to develop the law in this way.

Provisional settlement agreed in Merricks v Mastercard collective action

On 3 December 2024, it was announced that a provisional agreement has been reached between Mr Walter Merricks (the Class Representative) and Mastercard to settle the long-running Merricks v Mastercard collective proceedings.

The following statement was made by the Class Representative: 

"I am very pleased that after nearly 9 years of litigation with Mastercard, I have agreed a settlement that I believe will deliver meaningful compensation to class members who choose to come forward to participate in the distribution of the damages. Ever since I began my claim I have aimed to ensure that the new regime for collective redress can be seen to work effectively and to do that I had to take my case to the Supreme Court. I now look forward to presenting the details of the settlement to the Tribunal for its consideration and approval."

The proceedings which were brought before the Competition Appeal Tribunal (CAT) in 2016, under section 47B of the Competition Act 1998, stem from a European Commission's 2007 decision finding that MasterCard had breached Article 101 of the Treaty on the Functioning of the European through its unlawful European Economic Area multilateral interchange fees. 

The class consists of individuals who purchased goods or services from UK businesses accepting Mastercard between 22 May 1992 and 21 June 2008. The claim is valued at £10 billion. 

Certified in 2021 following appeals to the Supreme Court, this case has seen multiple significant rulings on class representation, evidence, limitation, and causation. The CAT is currently considering pass-on issues in this case and the Merchant Interchange Fee Umbrella Proceedings.

The CAT must approve the settlement before it can proceed, though no date has been set for its consideration of a collective settlement approval application.

PSR consults on new approach to procuring central infrastructure for Faster Payments

On 3 December 2024, the Payment Systems Regulator (PSR) published a consultation paper (CP24/13) on proposed changes to Specific Direction 3 (SD3).

SD3 outlines the legal requirements for Pay.UK in procuring upgraded infrastructure for payments currently made over Faster Payments (FPS). In CP24/13, the PSR sets out its proposed new approach to procuring central infrastructure.

In the light of changed circumstances surrounding the New Payments Architecture (NPA) programme, Pay.UK can no longer meet the SD3 deadline to migrate all FPS transactions by 1 July 2026. The PSR acknowledges that the current FPS infrastructure will likely remain operational longer than expected. As Pay.UK's FPS contract was renewed to align with the SD3 deadline, the PSR is acting now to ensure service continuity as Pay.UK will need to extend its contracts.

The PSR seeks views on:

• replacing the current SD3 deadline with an express reference to the PSR's ability to notify Pay.UK of a new deadline, no earlier than 1 July 2036

• the proposed criteria that the PSR will consider when deciding on a new SD3 migration deadline

• requiring Pay.UK to seek the PSR's non-objection before entering into a new central infrastructure contract for FPS or extending the existing one

• drafting SD3b (that is, varying SD3) to remove reporting requirements and expand the NPA reference to include new infrastructure and upgrades

• potential enhancements to the PSR's regulatory framework to address risks to competition and innovation. The PSR intends to publish a detailed timetable to follow alongside the SD3 decision. 

Comments on CP24/13 are due by 21 January 2025, with a policy statement expected in Spring 2025.

FCA follow-up work on Federation of Small Businesses super-complaint on lenders' demands for personal guarantees on business loans

On 9 December 2024, the FCA published details about its follow-up work to a super-complaint raised by the Federation of Small Businesses (FSB) concerning lender's use of personal guarantees to support loans to small businesses.

In its March 2024 response, the FCA stated it would collect data from lender firms to understand the number of personal guarantees in place as a proportion of lending to small and medium-sized enterprises (SMEs) (see our April 2024 update).

After reviewing the data, the FCA found no evidence of harm warranting further supervisory action or additional guidance but identified practices firms may adopt to address the FSB's concerns, including: 

• providing post-contractual information to guarantors to improve their understanding of ongoing liability, potentially reducing related complaints

• setting a borrowing limit below which personal guarantees are not required, addressing concerns about guarantees for small amounts. 

The FCA found that the number of personal guarantees supporting regulated lending is low and has no material concerns regarding compliance with its Consumer Credit sourcebook (CONC).

The FSB super-complaint was published in December 2023 under section 234C of the Financial Services and Markets Act 2000 (FSMA). 

FCA quarterly consultation 46

On 6 December 2024, the FCA published its 46th quarterly consultation paper (CP24/26), inviting feedback on proposed changes to the Handbook provisions.

In Chapter 3, the FCA proposes amendments to SUP 16.11, SUP 16 Annex 20G and SUP 16 Annex 21R, to clarify or improve the wording for better understanding relating to consumer credit product sales data reporting. This follows requests from firms for clarification on the final consumer credit product sales data rules that were published in April 2024.

The FCA has identified areas where clearer rules or guidance are required to help firms comply with the existing requirements. The proposed amendments aim to improve the language of the current rules, making them easier to understand and more practical for firms, without altering their policy scope.

The proposed changes are detailed in the draft Consumer Credit (Regulatory Reporting) (Amendment) Instrument 2024 in appendix 2 to CP24/26.

The deadline for submitting comments is 13 January 2025.

Motor finance commission

Financial Services Regulation Committee letter to FCA on motor finance judgment: December 2024

On 20 December 2024, the House of Lords Financial Services Regulation Committee published a letter it has sent to Nikhil Rathi, FCA Chief Executive, regarding the recent Court of Appeal judgment on motor finance commission in Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282.

The committee requests information from Mr Rathi on:

• the FCA rules and principles regarding discretionary and fixed commissions, noting that oral evidence from Finance & Leasing Association (FLA) in November 2024 suggested a conflict between the Court of Appeal's judgment and FCA's guidelines (rules or principles)

• whether the FCA sought legal advice before banning discretionary commission arrangements which took effect from 28 January 2021 and regarding its rules on commissions, including details of any advice and its context. The committee requests details of the circumstances in which any advice was sought and the full text of any advice.

The letter responds to Mr Rathi's letter to the committee of 13 November 2024, outlining the case background, the FCA's actions and its broader efforts to raise market standards. Mr Rathi sent a similar letter to the House of Commons Treasury Select Committee on the same date.

Financial Ombudsman Service update on car finance commission complaints: December 2024 

On 19 December 2024, the Financial Ombudsman Service (FOS) updated its webpage on car finance commission complaints, adding a "latest updates" section:

• The FCA announced temporary rules extending response times for motor finance complaints involving non-discretionary commission arrangement (non-DCA). This aligns with the rules for discretionary commission arrangements (DCA) announced in January 2024. This also extends the time consumers have to refer complaints to the FOS.

• Ongoing legal cases on commission arrangements in motor finance could impact the FOS' approach to similar complaints. The Supreme Court is set to hear an appeal in early 2025 on the Court of Appeal's judgment in Johnson, Wrench, and Hopcraft, which may influence FOS decisions. Additionally, the High Court recently upheld the FOS in a judicial review of a DCA-related complaint (R (Clydesdale Financial Services Ltd) v FOS [2024]). The FOS is reviewing this judgment closely.

FCA policy statement on further temporary changes to handling rules for motor finance complaints and new webpage

On 19 December 2024, the FCA published a policy statement (PS24/18) on further temporary changes to handling rules for motor finance complaints.
The FCA extended the deadline for firms to respond to complaints about motor finance agreements not involving a discretionary commission arrangement (DCA) received on or after 26 October 2024. Firms must respond by 4 December 2025. This aligns with the previous extension that the FCA has already provided for complaints involving DCAs. Consumers have until the later of 15 months from the final response or 29 July 2026 to refer their complaints to the Financial Ombudsman Service (FOS).

The FCA consulted on these changes in CP24/22, which was published in November 2024. Respondents broadly agreed with the proposals. Following feedback received, the FCA has confirmed that the complaint handling extension will cover motor leasing, as well as motor finance credit agreements.

The amendments to Dispute Resolution: Complaints Sourcebook are detailed in the Dispute Resolution: Complaints Sourcebook (Motor Finance Non-Discretionary Commission Arrangement Complaints) Instrument 2024 (FCA 2024/45) and take effect on 20 December 2024. This extension follows the Court of Appeal's judgment in Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282.

The FCA published a webpage summarising this decision and outlining its Consumer Duty expectations, including examples of good and poor practices. It highlights the consumer understanding outcome and advises firms to seek legal advice when responding to the judgment.

In an accompanying statement, the FCA notes that further updates on its review of DCAs will depend on progress in an appeal to the Supreme Court expected in May 2025.

Judicial review claim of Financial Ombudsman Service decision concerning motor finance discretionary commission arrangements dismissed

On 17 December 2024, the Administrative Court published its judgement in R (Clydesdale Financial Services Ltd) v Financial Ombudsman Service Ltd [2024]. The court dismissed Clydesdale Financial Services Ltd's judicial review of the Financial Ombudsman Service (FOS) decision from January 2024.

The FOS upheld a December 2021 complaint from an individual (JL), who purchased a car from Arnold Clark Automobile Ltd (ACAL) in November 2018. JL made no contract with ACAL but entered into a conditional sale agreement (CSA) with Clydesdale, which bought the car from ACAL. The issue centred on undisclosed commission arrangements between ACAL and Clydesdale, affecting CSA's interest rate. 

The FOS ruled that ACAL acted as Clydesdale's agent under the Consumer Credit Act 1974 (CCA), awarding JL compensation. The court noted that this decision could impact many other cases in the motor finance industry, as similar complaints have arisen.

At issue were both the commission arrangements themselves and what was disclosed and not disclosed to JL about them. In the decision, the ombudsman made a monetary award in JL's favour against Clydesdale, deeming ACAL to be Clydesdale's agent under provisions in the Consumer Credit Act 1974 (CCA).

On the same day, the FCA, which joined as a third party, published a statement responding to the judgment, noting that the court affirmed that that the FOS had correctly interpreted FCA rules and the CCA and was entitled to find that Clydesdale and ACAL failed to adequately disclose their commission arrangements, making the relationship between Clydesdale and JL unfair.

The FCA welcomed the clarity the judgment provided for consumer complaints involving DCAs. The Supreme Court will hear an appeal on related motor finance cases in April 2025, while the FCA plans to set out the next steps in its review of the historic use of DCAs in the motor finance market.

Supreme Court grants permission to appeal Court of Appeal decision in Johnson v FirstRand Bank Ltd 

On 11 December 2024, the Supreme Court published a press release announcing that it has granted permission to appeal the Court of Appeal decision in Johnson v FirstRand Bank Ltd t/a Motonovo Finance [2024] EWCA Civ 1282.

The case involves three appeals (Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd), heard together by the Court of Appeal, considering lender liability in the context of secret and "half-secret" commissions paid by lenders to credit brokers in the motor finance sector.

The appeals have been listed for 1-3 April 2025.

The FCA has welcomed the decision. Earlier in December 2024, it wrote to the Supreme Court in support of the application to appeal made by FirstRand Bank and Close Brothers (see our December 2024 update).

FCA findings on firms' approaches to Consumer Duty board reports

On 11 December 2024, the FCA published its findings from a thematic review into firms' approaches to completing the first annual Consumer Duty board report. The review covered reports from 180 firms across various sectors. The FCA identified key elements of good reporting, including:

• Clear outcomes focus: dedicated sections for each of the four customer outcomes. 

• Good quality data: reports should use strong management information to support conclusions.

• Analysis of different customer types: firms should consider diverse customer groups, including vulnerable individuals.

• Clear processes for production of report: firms should have clear processes to produce reports for firms' governing bodies to review and approve on time.

• Firm focus on culture: firms should provide a commentary emphasising their commitment to effectively implementing the duty and the role of a positive culture in delivering good outcomes.

The FCA assessed the reports based on its rules and guidance, focusing on governance, culture, data strategies and each of the four customer outcomes. Findings are grouped under four headings: report governance, monitoring and outcomes, actions taken to comply with duty obligations, and future business strategy, each heading including examples of good practices and areas for improvement were included.

FCA findings of thematic review into firms' approaches to complaints and root cause analysis

On 11 December 2024, the FCA published a webpage setting out its findings from a thematic review into firms’ approaches to complaints and root cause analysis. The review, based on 40 firms from a range of sectors, aimed to support effective embedding and implementation of the Consumer Duty. 

Key good practice identified effective management information (MI) and clear governance structures.

Key areas for improvement:

• Analysing data for different customer types: complaints data was often too broad to identify issues for specific customer groups, including vulnerable ones, leading to missed problems, especially where firms have diverse target markets for their products.

• Taking action based on the insights: there was a lack of clear discussions and actions based on data, resulting in missed opportunities to improve consumer outcomes.

• Assessing and measuring the impact of these actions: firms did not always assess the effectiveness of their interventions.

The FCA summarises its findings on its new webpage, highlighting best practices and areas needing improvement in complaints data, MI, root cause analysis, and governance.

FCA areas of focus under Consumer Duty

On 9 December 2024, the FCA published its priorities under the Consumer Duty for the rest of 2024 and into 2025. Key focus areas include:

• embedding the Consumer Duty and raising standards in firms

• enhancing firms' understanding of the price and value outcome

• consumer finance sector: evaluating whether firms' digital tools sufficiently help consumers understand credit agreements, with findings expected in H1 2025.

• payments and digital assets sector: assessing the clarity of pricing for foreign exchange services, with an initial focus on money remittance services and account to account transactions. This work will proceed in in 2025.

The FCA refers to its call for input relating to wider requirements on retail firms, which asked firms to consider where it can use the duty to simplify them.

The FCA acknowledges that stakeholders are aware of these initiatives but provides an overview due to industry feedback requesting consolidated information.

Financial Stability Institute document on regulating AI in financial services sector 

On 12 December 2024, the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a policy implementation insights document on developments and challenges relating to regulating AI in the financial services sector.

The FSI highlights AI use cases in the financial services sector and provides an overview of cross-sectoral AI-specific guidance. It also identifies practical issues in implementing cross-sectoral AI guidance in the sector. The FSI focuses on credit and insurance underwriting. These areas are expected to become a focus for financial authorities' AI regulatory work.

Key conclusions from the FSI include:

• Financial institutions' use of AI may amplify existing risks (such as model risk and data-related risk) but does not appear to introduce new risks at this stage.

• Cross-sectoral AI-specific guidance themes are broadly covered in existing financial regulations, reducing the immediate need for separate AI regulations. However, clarity on regulatory stance may encourage industry investment.

• Implementing existing financial regulations presents unique challenges with AI. Specific guidance may be needed in certain areas. Financial authorities should examine current regulations and consider issuing clarifications, revisions, or new rules for high-risk use cases. Important areas include governance, AI expertise and skills, and regulation of critical third parties (CTPs).

• Further research could explore additional areas, such as AI use in financial institutions' risk management, use of AI for regulatory compliance (RegTech), and supervisory approaches to AI oversight. These could offer further insights for regulators.

• Collaboration among financial authorities (both domestically and internationally) is important for understanding and monitoring evolving AI risks. An agreed definition of AI should be a priority, though it may need to evolve with the technology.

FCA research note on bias in supervised machine learning models

On 11 December 2024, the FCA published a research note providing a review of literature on bias in supervised machine learning (ML) models, aiming to stimulate a debate and gather evidence to support its decision-making in this area.

The FCA emphasises the importance of ensuring fairness in the use of AI systems. Its Consumer Duty guidance (FG22/5) highlights that AI systems embedding or amplifying bias could cause consumer harm. 

In this context, bias refers to unjustified differences in predictions or decision-making based on the demographic characteristics or social circumstances of a person (such as characteristics of vulnerability). These disparities may arise from several sources, including historical data biases, modelling choices or selective use of predictive models.

The note focuses on bias in supervised ML models. These are models where some available outcome (such as the future risk of defaulting on a loan) is predicted based on past training data. Specifically, the note focuses on how differences in predictions for groups sharing different demographic characteristics or characteristics of vulnerability might be measured, understood and mitigated.

The FCA stresses that addressing bias requires careful consideration of context to determine which demographic factors may be relevant and the appropriate methods for measuring and mitigating bias. However, the note does not offer opinions on what constitutes unfair treatment or discrimination from a legal standpoint, nor does it define what organisations must do to meet legal requirements.

European Commission adopts Delegated Regulation on composition of joint examination team under DORA

On 16 December 2024, the European Commission adopted a Delegated Regulation supplementing the Regulation on digital operational resilience for the financial sector (DORA) with regulatory technical standards (RTS) specifying the criteria for determining the composition of the joint examination team.

The Joint Committee of the European Supervisory Authorities (ESAs) was tasked under Article 41(1) of DORA to develop RTS ensuring balanced participation of staff members from the ESAs and relevant competent authorities, including their designation, tasks and working arrangements.

The ESAs published a final report containing the final draft RTS in July 2024, which they submitted to the Commission for adoption. The Delegated Regulation will apply 20 days after its publication in the Official Journal of the European Union.

FCA, PRA and Bank of England consult on operational incident and third-party reporting

On 13 December 2024, the FCA, PRA and Bank of England (BoE) published parallel consultation papers on operational incident and third-party reporting.

Improving operational resilience is a key priority for the FCA, PRA and BoE, especially as the financial sector becomes increasingly interconnected. The policy has been designed to be as interoperable as possible with similar and existing regimes, such as the Regulation on digital operational resilience (DORA) and the Financial Stability Board's (FSB) proposed Format for Incident Reporting Exchange (FIRE). The goal of the policy is to establish clear expectations for consistent, high-quality data on operational incidents and material third-party arrangements that pose sector risks.

The consultations contain proposals about:

• defining an operational incident

• requiring firms to submit standardised reports on incidents that breach defined thresholds

• introducing material third party reporting rules, which includes outsourcing and non-outsourcing arrangements.

All consultation papers close to comments on 13 March 2025, with the FCA aiming for rule publication in H2 2025 whilst the PRA and BoE are targeting a 2026 implementation date no earlier than H2 2026.

Joint Committee of European Supervisory Authorities statement on preparations for DORA application in January 2025

On 4 December 2024, the Joint Committee of the European Supervisory Authorities (ESAs) published a statement calling on financial entities and ICT third-party service providers to prepare for compliance with the Regulation on digital operational resilience for the financial sector (DORA) and its technical standards and guidelines by 17 January 2025.

The ESAs emphasised that DORA has no transitional period, and expects financial entities to:

• Identify and address gaps between their internal set-ups and the DORA requirements promptly.

• Prepare for the new reporting obligations, including making their registers of ICT third-party providers' contractual arrangements available early in 2025 so that competent authorities can report them to the ESAs by 30 April 2025. The ESAs advise entities to use lessons from the 2024 dry-run exercise and consider the implementing technical standards adopted on 29 November 2024.

• Ensure they are equipped to classify and report their major ICT-related incidents from 17 January 2025.

The ESAs note that competent authorities are prepared to supervise the DORA requirements based on risk, taking account of the EBA's, ESMA's and EIOPA's Union Strategic Supervisory Priorities (USSPs) and the EBA's 2025 European Supervisory Examination Programme (ESEP), which highlight cyber and digital operational resilience.

Additionally, the ESAs encouraged ICT third-party providers that meet criticality criteria (published in May 2024) to assess their compliance with DORA, as the first critical provider designations are expected in the second half of 2025.

FCA responds to House of Lords Financial Services Regulation Committee following evidence session on enforcement investigation transparency proposals

On 5 December 2024, the House of Lords Financial Services Regulation Committee published a letter from Nikhil Rathi, FCA Chair dated 27 November 2024, responding to questions raised during a session on 13 November 2024, which was part of the committee's inquiry into the FCA's consultation on a new approach to publicising enforcement investigations (CP24/2, Part 2).

Key points include:

• In response to a question about how many investigations into authorised firms over the past 10 years would have been disclosed under the FCA's proposed new framework, Mr Rathi explains that the FCA has not looked back this far. The new transparency framework is part of a broader strategy to increase focus and speed in enforcement, with the FCA anticipating 10-12 investigations annually, affecting only a small subset of firms.

• Increased transparency measures are intended to encourage whistleblowers but will not resolve all concerns identified in its May 2023 whistleblowing survey.

• In response to questions about Singapore's disclosure framework and comparisons with the US SEC, Mr. Rathi explains that while some UK regulators announce investigations, few international financial services regulators do. The FCA's remit is broader than international counterparts, involving a wider range of domestic and global partners. Unique among G7 countries, the UK also has specific accountability expectations. Unlike some jurisdictions, the FCA typically opens investigations into authorised firms only after extensive supervisory engagement, giving firms time to address issues before enforcement.

CP24/2, Part 2 was published on 28 November 2024 - see our December 2024 update.

EBA report on competent authorities' approaches to AML and CTF banking supervision: December 2024 

On 13 December 2024, the EBA published a report on its fourth review of competent authorities' approaches to tackling money laundering (AML) and terrorist financing (CTF) risks in the banking sector.

In 2023/24, the EBA assessed 14 competent authorities from nine member states, issuing tailored recommendations to support their AML and CTF work. The EBA also assessed how prudential supervisors in these member states tackled money laundering and terrorist financing risk in line with their supervisory remit and scope.

This round completes the assessment of all 40 competent authorities that are responsible for AML and CTF supervision in 30 EU and EEA member states.

The EBA found that all competent authorities in this round had taken important steps to implement a risk-based approach to AML and CTF. Since the first round of reviews in 2018, it has seen significant developments in supervisory approaches, including enhanced focus and investment in risk assessment methodologies and tools, and increased co-operation. Most competent authorities created dedicated AML/CTF units and increased resourcing in this area.

However, issues persist, including:

• weak entity-level or sectoral risk assessment methodologies

• lack of strategic AML and CTF supervision

• ineffective enforcement processes

• limited co-operation in the absence of AML and CTF colleges.

The EBA’s recommendations aim to address these challenges. It believes improvements in supervision will support the EU’s new AML/CTF framework. A final review will be conducted in 2025, ahead of the transfer of responsibilities to the new Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA).

FCA letter to Treasury Committee about regulatory perimeter areas of concern

On 10 December 2024, the House of Commons Treasury Committee published a letter (dated 6 December 2024) from Nikhil Rathi, FCA Chief Executive, regarding the FCA's December perimeter report.

Mr Rathi describes the report as a refreshed opportunity for the FCA to discuss with both HM Treasury and the Treasury Committee strategic gaps in the UK legislative framework.

The letter highlighted key "longstanding perimeter concerns" the FCA aims to address:

• whether investment consultants should be within the perimeter, particularly after the liability driven investment episode

• reforming the Consumer Credit Act 1974 (CCA) to address issues such as SME lending, which has been highlighted recently as a result of the Federation of Small Businesses (FSB) super-complaint against the FCA

• ongoing risks of harm where principals fail to adequately oversee the activities of their appointed representatives. The FCA is ready to engage further with HM Treasury on reforms to this regime

• determining where the perimeter should lie in relation to sports and non-financial spread betting. Financial spread betting sits within its perimeter, but that an alternative framework for sports spread betting may be more suitable. 

The FCA updated its perimeter report on 9 December 2024.

UK Financial Inclusion Committee: terms of reference

On 5 December 2024, HM Treasury published the terms of reference of the newly formed Financial Inclusion Committee.

The committee aims to address barriers preventing individuals and households from accessing affordable and appropriate financial products and services. Its purpose is to develop, co-ordinate and implement interventions to support financial inclusion in the UK and advise the government on its forthcoming Financial Inclusion Strategy, which will be published in 2025. Key focus areas include digital inclusion, access to banking services, savings, insurance, affordable credit and problem debt, and financial education and capability.

The committee will be chaired by Tulip Siddiq MP, Economic Secretary to the Treasury. A separate document lists other members, including the FCA, the Money and Pensions Service, key third-party stakeholders and industry bodies. Sub-committees will address digital inclusion and access to banking, credit and insurance.

A related government press release states that expanding credit will offer more choices and help prevent reliance on predatory lending, such as loan sharks or other exploitative financial practices.

Council of EU agrees negotiating mandate on proposed framework for financial data access Regulation

On 4 December 2024, the Council of the EU published a press release announcing it has agreed its negotiating mandate on the proposed Regulation on a framework for financial data access (FIDA).

The text of the Council's mandate for negotiating with the European Parliament is set out in an accompanying note (dated 2 December 2024), sent from its General Secretariat to its Permanent Representatives Committee.

Key points from the mandate include:

• The Council largely supports the European Commission's initial proposal, following a step-by-step implementation approach for the financial data access regime under FIDA.

• The Council aims to clarify FIDA's scope by defining what specific data sets, products or sectors it should cover and setting a timeframe for the commencement of the data sharing obligations. For example, the Council's position excludes data related to occupational pensions, but gives member states the option of opting into the FIDA regime. Additionally, data-sharing schemes can limit customer data sharing if it's not available in digital form.

• The Council's position also grants data sharing schemes the ability to introduce a time limit to the customer data to be shared if it is not readily available in digital form.

• The Council's position reinforces the rules governing third country financial information service providers (FISPs), which are entities that are authorised to access and use customer data to offer services such as financial advice and personal financial management. In addition, entities that qualify as "gatekeepers" would be strictly regulated and supervised to ensure fair competition.

The agreement on its mandate means the Council can start trialogue negotiations with the European Parliament and the European Commission with a view to reaching agreement on the final text of FIDA.

Welcome to the first edition of our new update, FinTech Matters, where we showcase some of the latest regulatory developments at the intersection of technology and financial services.

In this month's edition: 

• The FCA publishes admissions, disclosures and market abuse regime for cryptoassets.

• Regulators review MoU for payments systems in the UK.

• Motor finance commission updates.

• The FCA sets out its priority areas of focus under the Consumer Duty.

• The FCA reviews supervised machine learning models.

• Regulators consult on operational incident and third party reporting.

The answer to last month's question: Approximately 18.3 billion contactless payment transactions were made in the UK in 2023.

This month's question: 2025 is set to be a busy year for crypto regulatory developments in the UK. When is the FCA expected to publish a consultation paper on conduct and firm standards for all Regulated Activities Order (RAO) activities?

• Q1/Q2 2025

• Q4 2025

• Q3 2025

• As soon as possible.