As 2022 rolls in, it often feels like the only sensible thing to predict is unpredictability. However, encouraged by some of our accurate predictions for 2021, the Freshfields Fintech team has again decided to crowdsource its expectations for the year ahead. This post focuses on how regulation will shape the fintech sector – check out our separate posts on fintech sector growth and crypto developments.
Sharon: Clarity on competition regulation – we expect 2022 to deliver greater clarity on the substance of a number global proposals to reform antitrust laws and to introduce new regulation. A number of these proposals have, at their core, not only a focus on whether consumers have been presented with a choice, but also on how and when those choices have been offered. This will require fintech businesses, including those collaborating with them, to focus more closely on the growing interplay between applicable antitrust, privacy and consumer protection laws.
Brock: Stablecoin regulation gets serious – the current US Administration has already signaled it intends to take action on stablecoin activities, recently calling for legislation to strengthen oversight of the asset class, enhancing prudential standards and limiting the category of entities authorized to issue stablecoins. It also singled out custodial wallet providers for additional oversight. We expect this call for action will give rise to more aggressive regulatory supervision and enforcement, particularly if legislation gets held up in Congress. Look for initial requirements around greater reserve transparency and risk-management standards, with potentially novel applications as to the scope of supervisory authority. Elsewhere around the world, the Hong Kong Monetary Authority has proposed new regulations that in many ways would treat stablecoin issuers like banks.
Eugene, Natalie and Victor: PSD2’s school report and the year of open finance – we have seen the introduction of open banking in various jurisdictions across the world already (check out this podcast). But 2022 is expected to be the year of ‘open finance’ (especially in the EU) as regulators will take significant steps towards opening up the financial services industry via API-based data sharing. The start of the year will see PSD2 receive its first school report, as the EU Commission will assess how well PSD2 has performed (and whether any legislative changes or a PSD3 would be required) – this process will also look at whether PSD2 has successfully ushered in the open banking model, and whether it would make sense to copy-paste this approach to the wider financial sector, including insurance. This review will inform the strategy for bringing open finance to the region, and will need to build on/align with other EU initiatives focusing on data access, such as the European Data Strategy, the Data Act (due in February) and the regulation of gatekeeping platforms. In 2022, we can also expect to see the EU push forward on instant payments, with an initiative planned just before the summer break.
Igor and Vincent: Enhanced scrutiny payment for order flow model – investment firms will face enhanced scrutiny from EU regulators for operating under a 'payment for order flow' (PFOF) business model, which is popular among online brokers that have recently entered the market. Under the PFOF model, brokers route their clients’ orders to a third party for execution, for which they in practice often receive a fee from both their client and the third party executing the order. The EU Commission has published a draft legislative proposal as part of its Capital Markets Union package in which it proposes to ban investment firms from receiving fees from third parties for forwarding client orders to such third party for execution. If such proposal would come into effect, it would be in line with the position of the European Securities and Markets Authority, which takes the view that the PFOF business model causes a conflict of interest between the investment firm and its clients. In some EU countries, such as the Netherlands, a ban on PFOF business models has already been put into place.
Eva: Tech in the regulatory crosshairs – in 2022, a tech-focused regulatory pipeline will keep fintechs' legal and compliance teams busy. Taking the EU as a prime example, the focus will be on tackling regulatory fragmentation and ensuring that the “same activity, same risk, same rules” principle is applied across the board. It looks likely that significant numbers of fintechs and Big Techs will need to either adapt their business models or bring themselves in line with financial services regulation. Key changes on the horizon include:
- The EU’s Digital Operational Resilience Act (DORA), which looks set to be agreed before the summer. On top of new requirements for financial market players (e.g. on risk management and outsourcing), DORA introduces an oversight regime for critical third-party information and communication technology providers, many of which currently sit outside the regulatory regime (check out our recent post for more on DORA).
- Fintechs can expect further clarity on what the EU’s ‘Digital Finance Strategy’ will actually look like, as regulators will soon provide technical advice to the EU Commission on how to future-proof the financial services ecosystem. The focus will be on understanding the regulatory direction of travel on the regulation and supervision of: (i) fragmented value chains (in particular the increasingly fragmented merchant-facing payments value chain), (ii) platform business models and (iii) mixed-activity groups (i.e. Big Techs dabbling in financial services).
- A new AML single rulebook could prove to be a double-edged sword for European fintechs, as better harmonised AML rules across EU member states should make compliance in areas such as customer onboarding and reporting easier. However, the package also features more rigorous regulation in the crypto sphere – such as broadening the scope of the “travel rule” to cover certain cryptoasset transfers (for more on this subject, see our recent podcast and blog posts)
- In the UK, financial crime and AML remain a key FCA priority – and a temporary registration regime for UK cryptoasset businesses will expire at the end of March. The FCA is all too aware that a “significantly high number of [crypto service providers] are not meeting the required standards” and more generally, it is clear that the regulator still has concerns about the potential for cryptoassets to be used in financial crime.