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2024: Fintech Regulation in Focus

Regulation is a constant in the life of fintech and capital markets and 2024 will be no exception. In fact, it will be significant as we expect to see decisive movements in many areas. 

To add to that, regulation is often politically motivated – and never more so than in ESG, AI and crypto; and the impending UK general elections have accelerated timelines for various regulatory developments to ensure these are concluded successfully, ahead of any public vote. But with regulatory urgency comes opportunity. Innovators continue to plug the gaps opened by industry demand, technological challenges and regulatory compliance, to name but a few.

Here are some of the regulatory changes shaping our markets and impacting our clients this year. The list is certainly not exhaustive and there are many fast-moving parts; ESG and climate-related initiatives across global jurisdictions will warrant their own analysis. We will also continue to follow the SEC’s regulatory agenda; efforts to revitalise the UK listings market; the Bank of England’s proposals to mitigate against black swan events like the SVB collapse; and preparation for the remaining Basel capital standards as the banking sector gears up for UK implementation in July 2025.

We keep track of these regulatory developments over time and evaluate – with our clients – how they can make the most of these in their communications to the market, industry stakeholders and the media. 

If you find yourself impacted by any of the regulations mentioned in our blog and are interested in discussing your communications needs around these, please do get in touch. We look forward to hearing from you.

Sybille Mueller, Director

The Edinburgh reforms: Everything, everywhere, all at once?
In December 2022, the Chancellor unveiled a comprehensive plan to position the UK as a leading global financial hub. The initiative encompasses diverse reforms, spanning the FCA and PRA mandates, listing rules, IPO processes, and post-Brexit regulatory changes. Emphasis is placed on sustainable finance, ESG initiatives, and technological innovation, including digital currencies. Priorities, like UK listing rules reform, mentioned in Mr. Hunt’s Autumn statement, enjoy cross-party support, suggesting continuity in reforms irrespective of the outcome of the 2024 election.

MiFID II: unbundling rebundled
In 2023, the UK Investment Research Review, led by Rachel Kent, proposed remedies for MiFID II’s unintended consequences. Implemented in 2018, MiFID II’s ‘unbundling’ of research costs aimed for transparency but arguably harmed SME research coverage and research provider competition. Rachel Kent’s report suggests optional payment methods for the UK buy side, either in cash or as part of transaction costs. The FCA is reviewing these recommendations and is planning a January consultation, with new rules expected in summer 2024. Practical implementation details remain uncertain, prompting questions about unbundling’s reversibility.

The Consolidated tape: 3 tapes to rule them all
While a consolidated tape (CT) has been mooted since MiFID I in 2008, its progression has been hindered by discussions about the type of data it should contain, the data aggregation challenge itself and whether it can be provided at a reasonable cost.
Today, the progression of a CT in the UK aligns with the Edinburgh Reforms and the Government aims to establish a framework in 2024, as the FCA outlined the next steps for a CT.
Meanwhile, the EU revised its CT proposals, excluding pre-trade data and disappointing some market participants, and in January this year, the European Parliament voted to adopt Markets in Financial Instruments Regulation (MiFIR) and MiFID II.  This includes adopting the proposals for three CTs for Europe – a CT for bonds with a mid-2025 ETA, and CTs for equities and derivatives, both expected to be operational in 2026.

T+1: Settling of settlement set for May… in the US
In May 2024 US markets will move from a T+2 to a T+1 settlement cycle for trades in stocks, bonds and ETFs. While reduced settlement cycles promise lower transaction costs and a more efficient, de-risked market, challenges remain, specifically around minimising trade failures, which can be very costly. China and India have already made the switch, while US stock exchanges have been developing T+1 strategies and are under pressure to meet the deadline. Canada and Mexico are making the transition around the same time to maintain pace and alignment.
The EU lags and will be operating on T+2 settlement cycles as the US makes the move, facing additional challenges with fragmented financial infrastructures across the region. But in the UK, the T+1 transition was part of the Chancellor’s Edinburgh reforms (see above), where the Accelerated Settlement Taskforce was established to progress the project. A report is due in Q1 2024 with a two-phase approach to T+1 gaining support. The first phase would involve establishing market standards and ironing out logistics, while the second – the actual transition to T+1 – would take place at a later date.

Wholesale market data pricing: The reckoning
In March 2023 the FCA started investigating practices in the wholesale market data market, addressing concerns from both buy and sell sides stemming from pricing opacity, inconsistency and ‘suspected’ data provider behaviour that restricts or distorts competition. A recent study revealed significant disparities in costs for similar products, with some consumers paying many multiples more than peers for the same products. The FCA is expected to announce findings by March 1, 2024, which are likely to affect index providers, credit rating agencies, and market data providers. Using its powers under the Enterprise Act, the FCA may introduce new rules, potentially signalling significant regulatory changes.

Crypto: ready for the regulatory renaissance? 
The first measures of the EU Markets in Crypto Assets (MiCA) legislation, focusing on stablecoins like e-money tokens and asset-referenced tokens, are set to take effect in June 2024. The broader MiCA regulations will come into force on 30 December 2024.  Just this week the European Securities and Markets Authority (ESMA) published two consultations on MiCA, one on the reverse solicitation exemption and one on the classification of crypto-assets as financial instruments.  The deadline for comments is 29 April 2024 and ESMA’s final report will be published in Q4 2024. 
In 2023, the UK’s Financial Services and Markets Act (FSMA) gained Royal Assent, extending regulatory oversight to stablecoins and cryptoassets. This move positions the UK as a potential global hub for crypto and digital assets, offering regulatory clarity and business confidence for investments in the sector. 
In the US, after high-profile crises like the collapse of FTX, the SEC took serious steps to regulate the crypto sector in the US.  In 2023, just one of the many actions it took was to file a legal complaint against Coinbase, alleging that it was operating as an unregistered exchange.  In December 2023 the SEC rejected Coinbase’s petition to create new crypto-specific regulation, disagreeing with Coinbase’s assertion that current regulations were ‘unworkable’.  The overall case is still ongoing, but could set a precedent for the SEC’s reach in terms of regulating crypto exchanges. Meanwhile, the SEC approved 11 Bitcoin ETFs early January 2024, in a watershed moment for the world’s broader crypto industry.

AI: Rise of the machines and the first legal battles
The EU and US both propose AI systems regulation, while the UK is striving for AI leadership by hosting the international AI Safety Summit at Bletchley Park. The emerging Bletchley Declaration emphasises global collaboration and encompasses not only avoiding catastrophe or threats to life and limb, but also priorities such as securing human rights and the UN Sustainable Development Goals. Meanwhile, President Biden’s Executive Order and Japan’s Hiroshima AI Process further address AI safety and The EU’s provisional AI Act framework, criticised for potential over-regulation, is still evolving. 
Legal disputes are also starting to emerge over AI models’ access to copyrighted material, with organisations like The New York Times suing gen AI platforms. With AI adoption accelerating, 2024 promises intensified global regulatory debates, albeit without clear international consensus on frameworks.

ESG: The Green Mile – how many standards can we take? 
ESG continues to grow globally, despite 20 US states now having rules against ESG investing. Sustainability and ESG issues are expected to deepen their integration into corporate strategies overall, driven by increasing climate change concerns. Regulators globally have stepped up the fight against greenwashing, emphasising transparency in marketing ‘green’ financial products. The International Sustainability Standards Board (ISSB) released initial reporting standards and the UK announced intentions to adopt it, but the UK’s Green Taxonomy introduction is delayed, so the UK continues to lag several other countries which have implemented their own. 
The EU’s Corporate Sustainability Reporting Directive (CSRD) came into force in January 2024 and the FCA’s Sustainability Disclosure Requirements (SDR) start in May 2024, while in the US, the SEC’s climate disclosure rules and California’s Climate Corporate Data Accountability Act will take effect in April 2024. The US, UK and EU all face potential impacts on the adoption of ESG principles from their 2024 elections, as climate change and sustainability continue to be politicised.
ESG regulations and standards are constantly evolving, so we will be following up with a more in-depth blog on this subject – coming soon.

Consumer Duty – no surprises so far:  Do the right thing
The FCA’s Consumer Duty regulations, enacted last year, set new standards and safeguards for consumers in financial services. Applicable to regulated firms, including e-money and payments sectors, the rules emphasise transparency, fair pricing, consumer understanding, and improved customer support. The phased rollout began on July 31, 2023, for existing products, extending to closed products on July 31, 2024. Fintech plays a crucial role in facilitating compliance reporting and customer journey tracking, raising expectations for tangible consumer benefits in 2024.

Operational Resilience: Finding DORA
The Digital Operational Resilience Act (DORA) took effect for EU financial organizations on January 16, 2023, with a two-year implementation window. DORA mandates firms to demonstrate cybersecurity and IT operational threat-handling capabilities. Applying to tens of thousands of EU financial institutions and global IT service providers which service EU businesses, compliance readiness for January 2025 is a key focus in 2024. In-scope participants range from payments and e-money firms to crypto organizations, fund managers, and clearing houses.

Payments: all roads lead from open finance to open banking
The payments industry in both the UK and EU faced growing regulatory scrutiny in 2023. In the UK, efforts centred on stablecoin regulation and bolstering customer protection through the Consumer Duty will take effect later in 2024. In the EU, the 2023 focus was firmly on ‘Payments D-Day’ in June, which marked the publication of the proposed directive (PSD3) and regulation for payment services (PSR). These are designed to boost consumer protections, encourage innovation and enable the shift from Open Banking to Open Finance by promoting data sharing, which will pave the way for growth in new types of financial services.  
With discussions around the digital euro, instant / embedded payments, open finance, and the UK Government’s National Payments Vision in scope for this year, the stage is set for a dynamic 2024.

OFCOM and the CMA vs. the Cloud providers: The Quiet Storm
In late 2023, Ofcom referred the cloud computing industry to the Competition and Markets Authority (CMA), citing a market dominated by two major providers, with customers finding great difficulty in switching suppliers. Better regulation of the cloud provision market could bring increased competition and innovation. This could bring the costs of running cloud services down and drive innovation amongst cloud users.

Watch this space!

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