UK cryptoasset businesses receive guidance on their anti-money laundering obligations

Around the world, the introduction of anti-money laundering (AML) rules has often been the vanguard of the regulation of cryptoassets. In the UK, recently updated sectoral guidance clarifies the scope of the UK AML regime for cryptoassets firms and highlights specific money laundering risk factors for those firms. It is also a reminder for UK cryptoassets firms to apply to register with the FCA for AML supervision as soon as possible.

JMLSG sectoral guidance for cryptoasset businesses

The UK’s Joint Money Laundering Steering Group (JMLSG) is an authoritative source for the industry when interpreting AML rules. It has recently updated its sectoral guidance for cryptoasset businesses that are in the scope of the UK’s Money Laundering Regulations 2017 (MLRs). The updated guidance is currently with HM Treasury for approval. Once approved, the FCA is required to consider the guidance in determining whether a firm has breached the MLRs.

How the MLRs apply to UK cryptoassets businesses

The MLRs have applied to “Cryptoasset exchange providers” (CEPs) and “custodian wallet providers” (CWPs) carrying on business in the UK since 10 January 2020. The key obligation imposed by the UK’s AML regime is the requirement to conduct know your customer checks and customer due diligence. The MLRs impose various further obligations, such as requiring firms to have policies to mitigate the money laundering/terrorist financing risks that they face, to conduct enhanced diligence in higher risk situations (e.g. by verifying the customer’s source of funds and source of wealth), and to monitor and keep records of customer transactions.

The need to register for AML supervision – key dates 

A key point to note is that since 10 January 2020 CEPs and CWPs are required to register with the FCA specifically for AML supervision before undertaking the relevant cryptoasset business, even if they are already FCA-authorised.

As a transitional measure, CEP/CWPs which carried on business in the UK before 10 January 2020 have until 10 January 2021 to be registered. The FCA requested that CEPs/CWPs operating pre-10 January 2020 should submit applications to register by 30 June 2020 to ensure time for processing (by default, the FCA has up to 3 months to determine an application for registration). Although that deadline has now passed, affected firms should nevertheless submit their applications as soon as possible.

Key insights from the JMLSG’s Guidance
  • What is a CEP? The definition of a CEP broadly captures services which exchange, or arrange the exchange of, cryptoassets for money or other cryptoassets, including cryptoasset ATMs. The guidance clarifies that, for example, the issuance of cryptoassets in return for goods, services, rights or actions is unlikely to amount to a CEP business (e.g. where cryptoassets are issued in return for click-throughs or product reviews). By contrast, a cryptoasset escrow service is likely to be a CEP when the firm has custody over the relevant cryptoassets. Whether cryptoasset miners are caught will depend on their business model.
  • Non-custodial wallets: The guidance indicates that the CWP definition is unlikely to capture firms which hold and store cryptographic keys but are not involved in their transfer. Hardware wallet manufacturers and cloud storing service providers are therefore likely to fall out of scope.
  • Presence in the UK: In most cases, firms will be brought within the territorial scope of the MLRs through a physical presence in the UK through which CEP/CWP business is carried on (including an ATM located in the UK).
  • Reporting obligations: While customer-related AML obligations only apply to the CEP/CWP parts of an in-scope business, firms are also reminded that the obligation to report suspicions of money laundering under the Proceeds of Crime Act 2002 are broader.
  • Who is the customer? For CEPs, generally the customer is the person requesting the exchange of cryptoassets. For CWPs, it is generally the person for whom they hold, store and transfer a cryptoasset. Other firms dealing with cryptoasset businesses should conduct customer due diligence (CDD) on a risk-sensitive basis and may need to apply additional measures where the relationship is akin to a correspondent banking relationship.
  • Scope of obligations: The guidance provides an overview of obligations for CEP/CWPs to undertake CDD, evidence a customer’s source of funds and wealth, and monitor transactions on an ongoing basis. It also indicates that blockchain analysis can form part of a CEP/CWP’s KYC measures in addition to (but not in place of) the measures required by the MLRs. In terms of record-keeping, the guidance says that relying solely on a blockchain record is not sufficient.
Specific AML risks arising in the cryptoassets sector

The guidance also summarises the JMLSG’s views on risks arising in the cryptoassets sector, as well as factors which may increase risk depending on individual business models. These include (among other things):

  • darknet and blacklisted addresses;
  • links to multiple jurisdictions;
  • dealing with funds originating from decentralised systems; and
  • the use of outsourced service providers or agents.

It also flags factors which cryptoassets firms could consider implementing to mitigate money laundering/terrorist financing risks, such as applying account/transaction limits and prohibiting transfers to third parties.

Next steps 

We can help firms with cryptoasset businesses determine whether they are in scope of the MLRs and to apply for AML registration with the FCA if necessary. Please get in touch if you would like to discuss the scope of the MLRs, the associated AML obligations, or the process for registration with the FCA.

With thanks to Priya Chand for her contribution to this post.

EU retains interchange fee cap on card payments for now

The ongoing Covid-19 crisis has underscored the importance of card payments. Regulators have responded by, for example, raising contactless payment limits and delaying the implementation of some regulatory policy. The EU has recently assessed the effectiveness of a major piece of legislation on card payments – the Interchange Fee Regulation – and concluded that it has been broadly successful and should not be amended until more data can be gathered.

What the IFR does

Interchange fees are charged by card issuers to payment acquirers on card transactions. Acquirers, in turn, charge fees to merchants, who may pass these costs on to consumers.

With a view to fostering the EU internal market and competition in EU card payments, the IFR was introduced to harmonise and regulate those fees charged by EU card issuers. The main aim was to lower interchange fees and, ultimately, reduce transaction costs for consumers. Most notably, the IFR caps interchange fees at 0.2% of the value of a transaction for debit cards and 0.3% for credit cards. 

Five years since the IFR was introduced, the Commission has produced a report on its successes and the areas which require further work.

If the cap fits: IFR successes

Areas where the Commission believes that the IFR has had “major positive results” so far include:

  • Increased volume of card payments: According to the Commission, lower interchange fees have meant increased card acceptance by merchants, resulting in greater numbers and value of domestic and cross-border card payments.
  • Lower costs for merchants and consumers: The report notes that the reduction in interchange fees has redistributed revenues from card issuers to acquirers and merchants, each respectively gaining and saving €1.2 billion per year. Merchant service charges (MSCs) for consumer cards should continue to lower as long-term acquirer contracts gradually adjust.
  • More transparency for merchants: 60% of merchants have taken the default option of seeing a breakdown of their MSCs (e.g. into interchange fees, scheme fees and the acquirer’s margin). The Commission hopes that price transparency will empower merchants to decide which cards to accept and so enhance competition.
Put on one’s thinking cap: More analysis needed

Areas where the Commission wants to focus future work include: 

  • Whether there is circumvention of fee caps: While no circumvention has been identified so far, the Commission says that it needs to continuously collect data on alternative flows (such as any remuneration which has the same effect as interchange fees). 
  • Whether small retailers have benefited from better price transparency: Smaller retailers may have limited administrative capacity to process a large number of fees or analyse complex fee structures and may therefore be tempted not to opt for a breakdown of their MSCs. The Commission notes that merchant surveys have so far elicited limited responses from small retailers.
  • Increased use of co-badging: The IFR gives consumers the right to integrate two or more payment brands into their payment cards. This may allow consumers to switch between card schemes or between debit and credit payments on a single card. The Commission believes that co-badging will become more important with the rise of e-wallets and so this requires further monitoring.
  • Separation of scheme and processing entities: Technical standards requiring the separation of payment card schemes and processing entities started to apply in February 2018. The Commission felt it did not have enough information to judge the success of these standards due to their relatively recent implementation and the long-term nature of processing services contracts. As such, the Commission will “enhance its monitoring” of how the separation rules are applied.
To cap it off: What happens next

The report concludes that more data is needed over a longer period before any changes are made to the IFR, including any adjustment to the maximum cap for interchange fees.

In the meantime, the Commission emphasises the need for continuous monitoring and robust enforcement, and the need to improve competition in the EU card payments market. As firms increasingly explore integrating payment services with smart devices, they can expect regulatory scrutiny on co-badging and the extent of consumer choice at point of sale. 

The Commission also hopes that new, innovative means of payment – such as the recently launched European Payments Initiative to be developed for SEPA Instant Credit Transfers – will facilitate market entry for new competition.

With thanks to Jason Wong for writing this post.

UK plans to regulate cryptoasset promotions and launches a review into how to boost the fintech industry

In recent months, the UK has clarified when cryptoassets may fall within the regulatory net and has started applying EU and FATF anti-money laundering standards to cryptoasset exchanges. Now HM Treasury is seeking feedback on a new proposal to bring unregulated cryptoassets into the scope of the financial promotions regime. Separately, an independent Fintech Strategic Review has been tasked with recommending how the Government can support the fintech sector.

Consultation on cryptoasset promotions

As previously promised in the budget, HM Treasury has released a consultation paper on bringing certain otherwise unregulated cryptoassets within the scope of financial promotions regulation.

This means that cryptoasset exchanges which deal in unregulated cryptoassets – and so do not need to be authorised by the FCA – will not be able market some of their services unless they operate under an exemption from the financial promotions restriction or have their adverts approved by an authorised person (see below).

Current reach of financial promotions regulation

Financial promotions regulation in the UK limits how certain types of investment may be marketed. For example, the restriction on financial promotions under section 21 of FSMA limits who can market certain types of investment.

Currently, only cryptoassets that are regulated are caught by UK financial promotions regulation. As set out by the FCA last year, “regulated cryptoassets” are security tokens (that provide rights and obligations akin to regulated investments) or e-money tokens (that fulfil the definition of e-money under the Electronic Money Regulations).

All other cryptoassets are “unregulated cryptoassets” and so are currently not subject to financial promotions regulation.

Rationale for intervention

The UK Cryptoassets Taskforce – comprising the Financial Conduct Authority, Bank of England and HM Treasury – identified misleading advertising and a lack of suitable information as a key consumer protection issue in cryptoasset markets. The Taskforce found that cryptoasset adverts, which are often targeted at retail investors, are not typically fair or clear and can be misleading, and noted that “[a]dverts often overstate benefits and rarely warn of volatility risks”.

The consultation also points to recent consumer research commissioned by the FCA, which has shown a significant increase in the number of consumers holding cryptoassets and that customers who were influenced by advertising were more likely to subsequently regret the purchase.


To address these concerns, the government has proposed that the scope of the financial promotion restriction be extended to certain unregulated cryptoassets. 

The consultation acknowledges that applying the financial promotions regime too broadly could stifle innovation without a proportionate benefit to consumer protection. The proposal is therefore limited to unregulated cryptoassets that are both fungible and transferable. The government’s view is that consumers buying tokens with these characteristics are liable to buy them with similar expectations to those that consumers tend to have when purchasing regulated financial services (e.g. an expectation that they will hold a stable value, or rise in value, and that markets will be sufficiently deep and liquid to allow them to sell their holdings easily and quickly).

The proposal also includes an additional exemption to the financial promotion restriction that would apply to any communication which merely states that a person is willing to accept or to offer cryptoassets in consideration for the supply of goods or services.

Approval of financial promotions by authorised persons

The effect of the financial promotion restriction is that an unauthorised person must have its financial promotions approved by an authorised person before they are communicated (unless an exemption applies). As many cryptoasset businesses are unauthorised, implementation of the proposal would result in the creation of new demand for authorised persons to approve financial promotions of cryptoassets (and a new market for this service).

In a separate, but related, consultation paper released on the same day, HM Treasury puts forward changes which would require authorised firms to obtain specific permission from the FCA before undertaking approvals of financial promotions (the current position is that any authorised firm is able to approve any financial promotion of any unauthorised firm). This permission would be designed in such a way as to ensure that only authorised firms with the relevant expertise are able to approve the promotion of a particular product type.

This proposal has been prompted by, amongst other things, authorised firms approving promotions without sufficient understanding of the product or service and/or without conducting sufficient due diligence (e.g. accepting the information provided to them by unauthorised persons at face value without forming their own views). In practice, it may prove difficult in the short term for cryptoasset businesses to find authorised firms with the relevant expertise to approve financial promotions of cryptoassets.

Ongoing focus on fintech related regulation

These consultations were released on the same day as the launch of an independent Fintech Strategic Review, which aims to identify priority areas for industry, policy makers and regulators to support growth in the fintech sector. 

The terms of reference of the Fintech Strategic Review identify “a forward leaning approach to regulation” as a key source of the success of the UK fintech ecosystem to date. They also identify recommendations for “promoting the UK as a key market to establish and grow a fintech company” as key outcomes of the review. This suggests that there will be a continued focus on developing regulation to further support the growth of fintech in the UK. 

What happens next?

Both financial promotions consultations close on 25 October 2020. Meanwhile the Fintech Strategic Review aims to report its recommendations to the Government at the start of 2021.

UK Finance sets out strong customer authentication implementation plan for e-commerce payments

In April, the UK’s Financial Conduct Authority extended again the deadline for the implementation of strong customer authentication in respect of e-commerce payments. UK Finance, which is leading the migration to SCA in the UK, has now published an implementation plan to ensure the market is ready this time. Whilst the FCA’s deadline is set for September 2021, the plan contemplates that all participants will be compliant and ready for testing by next May.

SCA requirements for the e-commerce industry

EU payments regulations require payment service providers to ensure strong customer authentication is carried out for certain types of payment transactions. For remote electronic payments, as well as requiring at least two independent types of authentication data from the payer, SCA requires the transaction to be “dynamically linked” to a specific amount and a specific payee. 

Implementing these requirements in the e-commerce industry has proved time-consuming and challenging, not least because it requires all participants in the payment chain – including e-merchants, gateways, acquirers and issuers – to have the relevant systems in place. Disruption caused by the pandemic has also not helped matters. 

Extensions of deadlines

Last October, the European Banking Authority extended the SCA deadline for e-commerce payments to December 2020. However, it has refused to respond to industry requests to go further.

The FCA, on the other hand, announced in April that it was pushing the deadline back to September 2021 as a result of the Covid-19 crisis, having already previously extended it to March 2021. It stressed, however, the need for the industry to have in place a detailed implementation plan for meeting this new deadline.

UK Finance implementation plan

UK Finance has been coordinating the development of such a plan, which it has now published. The plan provides for a phased implementation, with the intention of minimising disruption to consumers:

  • Phase 1 – Development (2020): The aim during this phase is to ensure all parties, and in particular e-merchants, have adopted certain security protocols, such as 3DSecure (a protocol designed for online card-based payments).
  • Phase 2 – Market Readiness (1 Jan – 31 May 2021): E-merchants and issuers are expected to complete implementation during this phase. 
  • Phase 3 – Full Ramp-up (1 Jun – 13 Sep 2021): This will be a period of testing and transition during which issuers will start checking randomly if e-commerce transactions are SCA compliant and “soft declining” those that are not. 

The FCA has said that after 14 September 2021 firms that fail to comply will be subject to “full FCA supervisory and enforcement action”.

Relaxations in relation to contactless payments and online banking

Aside from e-commerce, firms are already obliged to be fully compliant with SCA requirements. However, the FCA has indicated that it is currently taking a more relaxed approach to enforcement in respect of contactless payments and online banking, in light of current circumstances.

European Payments Initiative promises new cashless payment solution to rival global card schemes and stablecoins

16 European Banks have officially launched the ‘European Payments Initiative’ to create a pan-European card and digital wallet for in-store, online and peer-to-peer payments. The initiative has been strongly supported by the European Commission and the European Central Bank and will be built on the Eurosystem’s recently rolled-out instant payment settlement infrastructure. Other payment service providers are invited to join as founding members by the end of this year.

Official launch of the European Payments Initiative

An initiative to create a pan-European retail payment solution has now been officially launched by a consortium of European banks. The project, previously referred to in the market as the Pan-European Payment System Initiative (or “PEPSI”), aims to create a card and digital wallet for in-store, online and peer-to-peer payments, as well as for cash withdrawals. Importantly, it will be designed for use across Europe, having a key objective to reduce fragmentation and promote the European single market.

The bank consortium comprises: BBVA, BNP Paribas, Groupe BPCE, CaixaBank, Commerzbank, Crédit Agricole, Crédit Mutuel, Deutsche Bank, Deutscher Sparkassen- und Giroverband, DZ BANK Group, ING, KBC Group, La Banque Postale, Banco Santander, Société Générale and UniCredit. 

Privately led, publicly backed

The initiative has received strong support from the European Central Bank as well as the European Commission, which rolled out a new Retail Payments Strategy last November. 

Both authorities have been looking to promote solutions that could limit EU dependency on foreign players (including international card schemes and Big Techs), support the role of the Euro on the global stage and reduce fragmentation across Europe. The ECB flags, for example, that ten European countries currently have national card schemes that do not accept cards from other EU member states.

In a speech last November, ECB Executive Board member Benoît Cœuré called on European stakeholders to “to step up their collaboration and act together to provide payment solutions that both reflect the demands of consumers and strengthen the Single Market”.

Cue the European Payments Initiative. 

Leveraging European instant settlement infrastructure 

The EPI will be based on the SEPA (Single European Payments Area) Instant Credit Transfer scheme. As such, it will utilise the Eurosystem’s TARGET Instant Payment Settlement (TIPS) system, which enables the instant and irrevocable settlement of Euro payment transactions 24/7 and across the EU. TIPS was launched in 2018 in response to growing consumer demand for instant payments and the emergence of national solutions posing fragmentation risks.

Next steps

The EPI expects to commence implementation in the coming weeks, beginning with the establishment of an interim company and a technical and operational roadmap, before finalising its corporate structure. It has invited other payment service providers to join the initiative as founding members before the end of 2020 and is aiming to become operational in 2022.   

Meanwhile, in the UK

UK authorities have also been focused on addressing evolving consumer needs in retail payments. Last month the Bank of England closed its consultation on a “platform model” central bank digital currency for retail use. Work also continues on developing the New Payments Architecture to replace the UK’s retail interbank clearing and settlement systems.

Now Effective: The U.S. CFTC’s guidance on “actual delivery” of virtual currency

The Commodity Futures Trading Commission (“CFTC”) has issued interpretive guidance on what constitutes “actual delivery” of a virtual currency. This now-effective guidance clarifies when these products are within the CFTC’s regulatory reach.

Under the Commodity Exchange Act (“CEA”), the CFTC has long had jurisdiction over a contact for future delivery of a “commodity” (including, as described below, certain virtual currencies). Since 2010, the CFTC also has jurisdiction over any “retail” commodity transaction involving leverage or margin except where the transaction ‘‘results in actual delivery [of the commodity] within 28 days or such other longer period” as the CFTC may determine. . . . This exception has required the CFTC to grapple with the nigh metaphysical and oxymoronic interpretation of actual delivery of virtual currencies. After first soliciting public input in 2017 regarding this concept, the CFTC issued final guidance on May 24, 2020 (the “2020 Guidance”) that became effective June 24, 2020.

Virtual currency as a commodity

The 2020 Guidance restates the CFTC’s view that a virtual currency:

  • is an asset that encompasses any digital representation of value or unit of account that is or can be used as a form of currency (i.e., transferred from one party to another as a medium of exchange);
  • may be manifested through units, tokens, or coins, among other things; and
  • may be distributed by way of digital ‘‘smart contracts,’’ among other structures.

The CFTC considers a virtual currency, as described above, to be a commodity as defined in CEA section 1a(9). This is more or less consistent with the broad application of the CEA by the CFTC to many other intangible commodities (e.g., renewable energy credits and emission allowances, certain indices).

How is “actual delivery” of virtual currency achieved?

Paraphrasing the 2020 Guidance, actual delivery occurs when: 

  1. a purchasing party secures (a) possession and control of the virtual currency and (b) the ability to freely use the entire quantity of the virtual currency (i.e., away from any particular execution venue) no later than 28 days from the date of the transaction and at all times thereafter; and 
  2. the offeror (e.g., those with control of a particular blockchain protocol) and the counterparty seller do not retain any interest, legal right, or control over the commodity at the expiration of the 28 days from the date of the transaction.

For example, “actual delivery” will have occurred:

  • if the virtual currency’s public distributed ledger evidences record of the transfer within 28 days of entering into the transaction; or 
  • where seller has delivered the entire quantity, the purchaser has secured full control and the virtual currency is not subject to any legal rights of seller 28 days after the transaction.

In contrast, “actual delivery” will not have occurred where:  

  • a full purchased amount is not transferred away from a digital account or ledger system;
  • a transaction is merely evidenced by the seller’s book entry; or
  • a purchase is rolled, offset against, netted out or settled in cash or virtual currency.

Five emerging competition trends in the European payments sector

The rapidly evolving payments sector is raising a number of new competition-related issues, attracting interest from both competition and financial sector authorities. In a new publication, we look at five emerging trends in this area: (i) increased scrutiny of Big Tech under abuse of dominance rules; (ii) the use of “soft enforcement” tools; (iii) competition objectives driving the regulatory agenda; (iv) enhanced scrutiny of digital / payment mergers; and (v) competition issues around global stablecoins and alternative payment systems.

Emerging trends in a fast-paced sector

The digitalisation of payments markets and entry of new players, including Big Tech, are raising a number of competition-related concerns, drawing attention from market participants, financial sector authorities and competition authorities alike. Against this backdrop, we have released a new publication exploring five emerging trends in the area. The key takeaways are outlined below. 

1. Big Tech and concerns over abuse of dominance 

Big Tech’s entry into the payment space is a source of many competition-related concerns. In particular, based on experience in digital markets, authorities worry that Big Tech players could potentially abuse their dominant positions, for example to preference their own services or restrict interoperability with their products.

European authorities seem to be keeping an increasingly watchful eye out for this type of behaviour. Notably, this month the European Commission announced that it has opened a formal antitrust investigation to assess whether Apple’s conduct in connection with Apple Pay violates EU competition rules.

This is not the first scrutiny of Apple Pay, with concerns previously having been investigated in Switzerland in response to a complaint by Swiss fintech company, TWINT. The Swiss Competition Commission ultimately closed its investigation after Apple committed to provide a “technical solution” to address the concerns of the complainant.

2. Use of “soft enforcement” tools

Another recent trend has been the broad use of market studies and inquiries to examine competition issues in the payments sector. For example:

  • In the UK, the Financial Conduct Authority and Payment Systems Regulator have used these tools as their primary means of examining competition issues in financial services. This includes, for example, the PSR’s ongoing market review into the supply of card-acquiring services
  • In the Netherlands, the Authority for Consumers and Markets has launched a market study into the activities of major tech firms in the Dutch payments market. It is looking at the existing and potential activities of both US and Chinese players.
  • Similarly, in France, the Autorité de la concurrence has launched a public consultation into the fintech sector, with a focus on the development of the role of large digital platforms in payment services.  
  • In Greece, the Hellenic Competition Commission is also carrying out a sector inquiry into fintech. 

These tools can be used as a means of “soft enforcement”, helping competition authorities and sector regulators to identify and address systemic issues affecting competition. They can also serve as an important information gathering tool. However, they have in the past attracted criticism as ineffectual and an inefficient use of vast amounts of time and resource.

3. Competition objectives driving the regulatory agenda

Competition objectives – in particular, concerns around maintaining a level playing field – were driving the last wave of European payments regulation and are likely to drive the next. 

For example, a key aim of the EU’s revised Payment Services Directive (PSD2) was to “open up payments markets to new entrants leading to more competition, greater choice and better prices for consumers”. Notably, its focus in this regard was on tackling the incumbency advantage of traditional banks

There are now concerns that the playing field could tilt too far in favour of Big Tech and the Commission’s expert group on regulatory obstacles to financial innovation (ROFIEG) has made a number of recommendations to address this. For example, it recommends legislative action to broaden and even out the use of user-driven data sharing, which may require Big Tech to share access to more of the valuable customer data they hold. It also recommended new rules to prevent large, vertically integrated platforms from unfairly discriminating against downstream services that compete against their own downstream services. 

The Commission has since launched a consultation on a Retail Payments Strategy for the EU. Notably, the consultation paper discusses the potential opportunities for pan-European payments solutions to thrive and to “reduce EU dependency on global players, such as international card schemes, issuers of global “stablecoins” and other big techs”.

4. Merger control: enhanced scrutiny of digital payments deals

2019 saw intense global debate about whether merger control rules remain fit for purpose in the digital era. There is a perception that potentially problematic deals have been slipping through the net, either because they are not being notified in the first place (having not triggered relevant thresholds) or because they are not sufficiently scrutinised during merger control review. 

In a commonly quoted statistic, over the last decade, Amazon, Apple, Facebook, Google and Microsoft have together made over 400 acquisitions, but only a handful were reviewed by competition authorities and none blocked.

This has led to a host of studies across the globe, which are likely to result in enhanced scrutiny of deals going forward. The emerging themes include:

  • Use of deal value thresholds, proposed as a way to catch “killer acquisitions” (designed to eliminate sources of potential future competition) which may not otherwise be notifiable due to low target turnover. While deal value thresholds have been introduced in Austria and Germany they appear to have been ruled out in the UK and at an EU level.
  • The need to look at counterfactuals in considering whether a target constitutes “potential competition” to the acquirer. For example, in the absence of the merger, could the target have become a realistic challenger to the acquirer in question?
  • Conglomerate effects – i.e. the notion that a merging party will be able to leverage a strong position in one market into a related market and use its strengthened position to foreclose competitors through tying and bundling strategies. 

The European Commission may explore at least some of these themes in its review of Mastercard’s proposed acquisition of Nets’ account-to-account payment business, for example. The Commission has accepted a referral request from a number of national competition authorities to review the transaction, concluding it is best placed to examine potential cross-border effects. In accepting the referral, the Commission noted that the transaction threatens to significantly affect competition in a Nordic or EEA / UK-wide market for the provision of real-time account-to-account central infrastructure services.

5. Global stablecoins and state-backed alternatives

Global stablecoin proposals, like Facebook’s Libra, offer the promise of healthy new competition for retail payments markets. This could help drive benefits for consumers, particularly in the areas of financial inclusion and cross-border payments.

At the same time, new payments infrastructure that involves wide industry collaboration and the likelihood of rapid global scaling may pose a threat to fair competition (as well as raising other policy risks, for example around monetary policy and financial stability). 

In particular, the involvement of Big Tech has raised concerns in some corners around the risk of markets tipping in their favour due to, for example, network effects and the exponential benefits of access to data. As a result, in addition to action from financial sector authorities, the European Commission has already started an antitrust probe into Libra (i.e. well before any launch).

Concerns around the risks posed by global stablecoins have led to a number of policymakers considering state-sponsored alternatives. 

Various central banks have accelerated research and/or development work around central bank digital currencies (CBDCs). For example, the Bank of England, which has not previously been an active proponent of CBDCs, published a discussion paper on a “platform model” CBDC for retail use earlier this year. 

CBDCs, however, raise their own issues. For example, depending on how it is designed, a CBDC may benefit from certain structural advantages over competing commercial initiatives. This could potentially risk displacing certain elements of the commercial market, to the detriment of the diversity and resilience of the overall payments landscape.  

As well as exploring CBDCs, the European Central Bank has welcomed a strategic initiative by a consortium of European banks to create a new alternative retail payment system. This type of industry-led/ state-backed solution may also raise competition concerns – for example, as a result of competitor collaboration and/or any structural advantages such an initiative would involve.

Contact us

Should you have any questions around competition-related issues in the payments sector, or the payments sector more generally, please don’t hesitate to get in touch.

International AI standards proposed for securities market intermediaries and asset managers

Numerous regulators have noted that the use of artificial intelligence in financial services has the potential to create new risks or amplify existing risks. In response to those concerns, the International Organization of Securities Commissions has drafted guidance for how AI and machine learning should be overseen. The guidance provides an insight into the approach national regulators are likely to take as AI becomes more commonplace in securities markets.

IOSCO consultation paper on AI

IOSCO, the global standard setter for the securities sector, is consulting on new draft guidance to its members on the use of artificial intelligence and machine learning by market intermediaries and asset managers. Once finalised, the guidance would be non-binding but IOSCO would encourage its members to take it into account when overseeing the use of AI by regulated firms.

IOSCO’s membership comprises securities regulators from around the world. It aims to promote consistent standards of regulation for securities markets.

Six measures to address AI risks

The draft guidance puts forward six fairly detailed measures for regulators to impose on the firms they supervise to reflect expected standards of conduct. In short, these cover:

  1. having designated and appropriately skilled senior management responsible for the oversight of AI and a documented internal governance framework with clear lines of accountability,
  2. adequate testing and monitoring of AI algorithms throughout their lifecycles,
  3. ensuring staff have adequate skills, expertise and experience to develop and oversee AI controls,
  4. managing firms’ relationships with third party providers, including having a clear service level agreement with clear performance indicators sanctions for poor performance,
  5. what level of disclosure firms should provide to customers and regulators about their use of AI, and
  6. how to ensure that the data that the AI relies on is of sufficient quality to prevent biases.

These measures are intended to tackle the perceived problems of AI around resilience, ethics, accountability and transparency, which we explore in our report on Artificial Intelligence in Financial Services: Managing machines in an evolving legal landscape.

IOSCO’s guidance is subject to the principle of proportionality. Notably, it emphasises that the size of firm is not the only relevant factor in this regard and that regulators should also consider the activity that is being undertaken, how complex and risky it is, and the impact that the technology could have on clients and markets.

AI not yet receiving special treatment?

As well as setting out its guidance, the report also indicates some of its findings from industry discussions. Many of these findings suggest that, despite broadening and increasingly sophisticated use of AI, firms have not generally made special arrangements for its governance. For example, according to IOSCO, many firms:

  • do not employ specific compliance personnel with the appropriate programming background to appropriately challenge and oversee the development of machine learning algorithms
  • use the same development and testing frameworks that they use for traditional algorithms and standard system development management processes
  • say that they do not have the human resources or the right expertise at all levels to always fully understand AI and ML algorithms.

One reason for this could be that AI is generally not yet subject to special regulatory treatment. The IOSCO paper makes the point that many jurisdictions have overarching requirements for firms’ overall systems and controls but only a few have regulatory requirements that specifically apply to AI- and ML-based algorithms.

How firms are using AI today

According to IOSCO, market intermediaries are already using AI in their advisory and support services, risk management, client identification and monitoring, selection of trading algorithms, and asset / portfolio management. By contrast, asset managers’ use of AI is in its “nascent” stages and is “mainly used to support human decision-making”. This is consistent with the findings of the Bank of England and FCA from a 2019 survey of UK financial institutions.

What happens next?

The consultation on the draft guidance closes on 26 October 2020.

In the UK, the FCA is currently working with the Alan Turing Institute to look at the implications of the financial services industry deploying AI. Meanwhile, the European Commission has released its own guidelines for trustworthy AI and is expected to propose legislation in this area later in 2020.

UK response to Wirecard insolvency highlights the importance of operational resilience

The Financial Conduct Authority’s decision to temporarily curtail Wirecard’s UK business had a knock-on effect for the fintech firms which rely on its services. As those firms sought to resume services as quickly as possible, there are lessons to be learned for the fintech sector and its approach to operational resilience.

The FCA’s immediate response to Wirecard

The news of German payments provider Wirecard entering into insolvency proceedings in the wake of a €1.9bn alleged accounting fraud has shaken the European fintech industry.

In the UK the FCA temporarily imposed restrictions on Wirecard’s UK subsidiary, a regulated payment institution which issues e-money onto prepaid cards. These restrictions meant that Wirecard Card Solutions Limited (Wirecard UK):

  • must not dispose of any assets or funds
  • must not carry on any regulated activities
  • must set out a statement on its website and communicate to customers that it is no longer permitted to conduct any regulated activities.

In a statement, the FCA said that its primary objective is to “protect the interests and money of consumers who use Wirecard”. This action has come soon after the FCA consulted on new guidance for payments firms on safeguarding customer money.

Certain of the requirements imposed have since been lifted, subject to close monitoring, allowing Wirecard UK to resume regulated activity, issuing e-money and providing payment services.

Impact on wider fintech industry

Several UK fintech firms rely on Wirecard UK’s services for operational support, as they use Wirecard UK’s technology to issue prepaid cards and process payments. For the period that Wirecard UK was unable to perform regulated payment activities, these fintechs were unable to access those Wirecard services. As a result, they were having to restrict the services they provided to their customers.

Some fintechs had to tell their customers that their accounts were temporarily inaccessible. Others were able to find workarounds and/or switch to alternative providers. The Department for Work and Pensions set up a dedicated team to assist individuals who could no longer receive their benefits payments through apps or cards associated with Wirecard.

Regulatory focus on operational resilience

The Wirecard incident has shone another light on the sorts of events which require appropriate operational resilience planning and procedures. Business disruption, like that caused by the failure of a third party provider, is inevitable. This is a view shared by the UK regulators who are currently consulting on new rules aimed at improving the resilience of firms across financial services. The FCA’s statement on Wirecard UK specifically mentions this consultation, as well as the EBA Guidelines on Outsourcing Arrangements which apply to e-money and payment firms.

Not all fintech firms would be subject to the FCA’s proposed operational resilience rules, but those caught would (among other things) need to:

  • identify their important business services and the people, processes, technology, facilities and information that support them
  • set impact tolerances for each important business service
  • test their ability to remain within those impact tolerances through a range of severe but plausible disruption scenarios.

As increasingly critical players in the financial services ecosystem, fintechs need to be mindful of this regulatory focus on outsourcing and operational resilience. Mapping the various elements on which their businesses rely is an important aspect. But, as recent days have shown, swift and effective communications plans can be equally important to mitigate harm at times of operational disruption.

What happens next?

In the short term, the FCA continues to monitor Wirecard UK’s activities and to work with them to progress matters relating to the remaining requirements. Affected firms are continuing to address the disruption to their customers and can expect to receive follow-up communications from the FCA.

In the longer term, fintech firms can expect to face increased scrutiny in relation to both their operational and financial affairs. Firms may look to learn from this incident and re-evaluate their responses to the FCA’s proposed operational resilience rules as a result.

It remains to be seen whether there will be a wider impact on industry confidence and future investment in the sector.

Launching our Tech Legal Outlook 2020: Mid-Year Update

Given the seismic events of the year to date, we have produced a Mid-Year Update to our original Tech Legal Outlook 2020. In this Update we explore seven of the key global trends likely to shape the technology sector in the second half of 2020 and beyond, and consider the legal implications for businesses – including Fintechs.

Catalyst for change

The rapid outbreak of Covid-19 and the accompanying lockdown measures, have dramatically changed life as we know it and transformed the business outlook for 2020 and beyond. The crisis has provided a catalyst for change, with technology and data more critical than ever.

The role of technology

A striking feature of lockdown has been the need for a sudden shift to living and working online, and our continuing dependency on digital services for everything from healthcare to groceries, education to entertainment. The crisis has forced a change in behaviour and in some cases, required a change in law to facilitate new arrangements, protect national interests at a time of crisis, or to support those suffering financially.

The new normal

The “new normal” presents an evolving landscape with opportunities and challenges for the tech sector. Countries are emerging from lockdown measures, employees are returning to work and there continues to be the prospect of future outbreaks. By 8 June 2020 U.S. stocks, led by tech companies, had recouped losses from the lows of March. In the following week, global stocks began to fall after a rise in new Covid-19 cases in the U.S. and China. Big U.S. and Chinese tech companies have out-performed the market. However, growth across the wider tech sector has faltered and many organisations have experienced disruption and difficulties. Economic recovery is unequal and unpredictable.

Challenges ahead

Organisations will continue to grapple with the new normal for an extended period of time: overcoming new challenges where they seek to raise funds or make investments; protecting their innovation and intellectual property; adapting to a changing legal and regulatory environment; navigating an employment minefield; responding to significant changes to supply and demand; and addressing increased risks such as cyber threats. This presents a number of risks and legal issues for organisations to navigate.

Seven key trends

In our Mid-Year Update, we have focused on seven of the key trends likely to shape the technology sector in the second half of the year. Many of the trends originated before the pandemic: digital technologies have been transforming sectors, cyber-risk has been increasing, governments have been increasingly protectionist in their approach to foreign investment and increasingly seeking to regulate the digital economy. What is different is the pace of change.

Visit our Tech Legal Outlook 2020: Mid-Year Update page for a summary of the seven trends and to download your copy of the update.

Knotty by Nature: You Down with the OCC?

The US regulator of national banks and federal savings associations (the OCC) has published an Advance Notice of Proposed Rulemaking, seeking public comment on the digital activities of those banking entities. Among other things, it is asking whether the current regulations are fit for purpose. The findings are likely to influence the direction of rule-making efforts in this area. Interested parties are invited to comment by August 3, 2020.

OCC Notice

The US regulator of national banks and federal savings associations, the Office of the Comptroller of the Currency (OCC), has published an Advance Notice of Proposed Rulemaking (ANPR) seeking public comment on the digital activities of those banking entities. An ANPR is typically a precursor to a formal proposal of one or more rules. That is, issuing an ANPR is a tacit acknowledgment that the OCC is seeking a broader steer on policy before turning toward specific rule-making efforts.

Issues open for comment

The OCC generally seeks input on Title 12, Part 7, Subpart E and Part 155 of the Code of Federal Regulations, both of which regulate the electronic operations and activities of OCC-regulated banks. In particular, the OCC asks, among other questions:

  • Do the current regulations work?
  • Are they flexible and clear?
  • Do they hinder innovation and technological advancements in the banking industry?
  • Are they incomplete?
  • What types of cryptocurrency or other digital asset activities are being engaged in and what barriers are present that currently hinder their development?
  • How are distributed ledger technology and artificial intelligence being used?
  • What new payment technologies and innovation tools for compliance have been developed?
Next steps

The best way to predict the future is to create it. Interested parties should view this as the best and earliest opportunity to influence the OCC’s thinking on these matters. Comments are due by August 3, 2020.

European Parliament proposes legislative action on crypto-assets, cyber-resilience and digital onboarding

A European Parliament committee has published a draft report on digital finance which proposes initial legislative action in three areas: (i) a framework for cryptoassets, including an open-ended taxonomy; (ii) a common approach to cyber-resilience in the financial sector, including oversight of critical third-party tech providers; and (iii) measures to harmonise digital onboarding across the single market. These proposals are likely to inform the Commission’s new Fintech Action Plan, due to be finalised in Q3 2020.

New draft report

The European Parliament’s Economic and Monetary Affairs Committee (ECON) has published a draft report setting out its recommendations to the Commission in relation to digital finance. The recommendations draw on previous work done at a European and international level, including the ROFIEG report, EC consultations on cryptoassets and operational resilience and the G7 working group report on stablecoins, for example.

The report identifies three priority areas demanding pan-European legislative action: crypto-assets, cyber-resilience and data, as discussed below.

Echoing a familiar message, it emphasises that fintech law and supervision should be based on the following principles:

  • the same services and their associated risks being subject to the same rules;
  • technology neutrality; 
  • a risk-based approach.

It also highlights the importance of aligning with developing international standards in these areas.


ECON recommends that the Commission put forward a legislative proposal in relation to crypto-assets, to create legal certainty as well as to protect consumers and investors. It reiterates the need for a common taxonomy, but suggests this is made open-ended “given that crypto-assets are likely to experience a significant period of evolution in the coming years”. Settling on an agreed crypto-taxonomy may be a challenge, given the complexity in this area and judging from the contentious debates around the EU’s taxonomy for sustainable finance.

Notably, ECON indicates that an extension of the regulatory perimeter is likely, noting that applying existing regulations to previously unregulated crypto-assets will be necessary, as will creating bespoke regulatory regimes for evolving crypto-asset activities, such as initial coin offerings.”.


ECON recommends a legislative proposal on cyber resilience which ensures consistent standards of cyber security across the EU. In particular, it suggests legislative reform which focuses on:

  • modernisation;
  • alignment of reporting rules regarding technology incidents;
  • a common framework for penetration and operational resilience testing across all financial sectors;
  • oversight of critical third-party tech providers.

In recent weeks, the European Securities and Markets Authority (ESMA) has proposed new guidelines on outsourcing to cloud service providers and the International Organization of Securities Commissions (IOSCO) has proposed revising and extending its Principles on Outsourcing. This underlines the need for the Commission to align its work with that of other regulatory authorities, as ECON has emphasised.


The third legislative framework ECON proposes is around digital onboarding and the use of digital financial identities. Its proposal is reflective of the ROFIEG report finding that divergences in know-your-customer (KYC) processes across jurisdictions are “the single most important example of fragmentation which harms the provision of services across borders using FinTech” and its recommendations that the Commission “introduce legislation to fully harmonise the [KYC] processes and requirements across the EU…” and “take steps to achieve convergence in the acceptance, regulation and supervision of the use of innovative technologies for [customer due diligence] purposes…”.

The report also promotes policies to support data-driven innovation and data-sharing in the EU, including measures to address asymmetries and enhance oversight.

UK regulator wants payment firms to bolster protection of client money in current crisis

The UK’s Financial Conduct Authority has raised concerns that some payment firms are not adequately protecting their customers’ money. These concerns are particularly acute in the current economic crisis. The FCA has thus proposed new guidance to clarify its expectations of payment firms around safeguarding client money and prudential risk management. Stakeholders are invited to comment by 5 June 2020.

Concerns that payment firms are leaving consumers at risk

The FCA has raised concerns that some payments institutions and e-money institutions have not implemented payments regulations as it expected. With growing numbers of consumers using alternative payment providers and an economic crisis in full flow, it is keen to remedy this swiftly. In particular, it wants to ensure that payment firms are effectively protecting their customers’ money and have robust risk management frameworks in place. 

Consultation on temporary guidance

To address these concerns, the FCA plans to issue some temporary guidance to clarify payment firms’ obligations in respect of safeguarding and prudential risk management. The guidance may serve as a checklist for payment firms to ensure they are operating in accordance with the FCA’s expectations. 

The FCA is inviting stakeholders to comment on its proposed guidance by 5 June 2020. Eventually, the FCA plans to incorporate the temporary guidance into its Payment Services Approach Document, which contains its main guidance for payments firms in these areas. 

The scope of the proposed guidance is outlined below.

Proposed guidance on safeguarding

Under UK payments regulations, payment firms are required to take measures to safeguard “relevant funds” (as defined in the regulations). This is to protect customers in the event of the payment firm’s insolvency. For example, e-money issuers need to safeguard the funds they receive in exchange for issuing e-money and authorised payments institutions must safeguard sums they receive for the execution of payments transactions. 

The Approach Document already contains detailed guidance as to how funds may be safeguarded. The FCA is now proposing to provide further clarifications as to its expectations, in order to strengthen firms’ practices. These include:

  • Reconciliation processes to be clearly documented. Where there is potential for discrepancies (for example, where funds are held in one currency in respect of a payment transaction in another), firms are required to make reconciliations at least daily. The FCA clarifies that it expects firms to clearly document this reconciliation process, and to provide an accompanying rationale, in order to help with the distribution of funds in the event of insolvency.
  • Notifications of non-compliance. Firms are required to notify the FCA of their failures to comply with safeguarding or reconciliation requirements. In this regard, the FCA expects to be notified of failures to keep up to date records of relevant funds and safeguarding accounts and where a firm is unable to comply due to the decision by a safeguarding credit institution to close a safeguarding account. 
  • Naming of client accounts. Safeguarded funds are required to be held in separate accounts with an authorised credit institution or authorised custodian. The FCA expects the names of such accounts to include the word “safeguarding” or “client”. Where this is not possible the FCA wants payment/e-money institutions to provide evidence confirming that the account has been appropriately designated.
  • Acknowledgement from safeguarding institution. Those providers of safeguarding accounts are not allowed to have any interest (such as a security interest) in them. The FCA wants payment firms to obtain an acknowledgement from the credit institution / custodian confirming this (and has provided a proposed form of acknowledgement letter).   
  • No other amounts to be mixed into safeguarding accounts. The FCA underlines the importance of ensuring that no other amounts are improperly mixed into a safeguarding account. It clarifies that the reason for this is that such mixing may cause delays in returning funds to customers if the firm becomes insolvent.
  • Periodic reviews of appointments of credit institutions, custodians and insurers. The FCA expects appointments of credit institutions, custodians and insurers to be reviewed whenever a firm believes that anything affecting the appointment decision has materially changed and, in any event, at least once a year.
  • Funds due to be safeguarded not available to meet commitments to card schemes or other third parties. The FCA expects that e-money issuers which issue, and allow customers to make payments with, e-money before receiving the corresponding funds from the customer should not treat amounts due which are subject to safeguarding requirements as available to meet commitments it has to card schemes or other third parties to settle the relevant payments transactions.
  • Protection of unallocated funds. Where firms are not able to identify which customer is entitled to the funds it has received, the funds will not qualify as “relevant funds” (to which safeguarding requirements apply). However, the FCA expects firms to protect these funds, for example by segregating them, and to take measures to identify the relevant customer.
  • Annual audit of compliance with safeguarding requirements. The FCA clarifies that it expects firms which are required to be audited to arrange specific annual audits of their compliance with safeguarding requirements. It also expects firms to satisfy themselves that the proposed auditor has sufficient skills, resources and expertise in auditing compliance with safeguarding requirements.
  • Small payments institutions to protect customer money too. Whilst not subject to safeguarding requirements, the FCA notes that it expects small payments institutions to keep a record of funds received from customers and the accounts into which those funds are paid. It also encourages these institutions to voluntarily opt in to meeting the safeguarding standards.
  • No misleading information on treatment of funds in insolvency. The FCA emphasises the need for firms to avoid misleading customers about how much protection they will get from safeguarding. For example, firms should not imply that customers’ claims would be paid in priority to the costs of distributing the safeguarded funds.
Proposed guidance on prudential risk management

Payments firms are required to meet certain prudential requirements in order to be authorised by the FCA. The FCA is now proposing additional guidance in the following areas:

  • Governance and controls. The FCA expects authorised payments institutions and electronic money institutions to have robust governance arrangements, effective procedures, and adequate internal control mechanisms. It also expects governance arrangements to be tailored to the business model and reviewed regularly.
  • Capital adequacy. The FCA emphasises the importance of ongoing, accurate calculations and reporting and outlines best practice around the representation of intra-group receivables.
  • Liquidity and capital stress testing. The FCA expects firms to carry out liquidity and capital stress testing and use the results to inform decisions, for example around resources, systems and controls.
  • Risk-management arrangements. The FCA highlights that firms should assess the need for committed credit lines to manage liquidity exposures and outlines best practice in respect of managing intra-group risk.
  • Wind-down plans. The FCA clarifies that firms are required to have a wind-down plan to manage their liquidity and resolution risks, and sets out what the plan should cover.

FCA and Alan Turing Institute to explore practical application of AI transparency framework

In 2019, the FCA and Alan Turing Institute embarked on a year-long project to look at the use of AI in financial services. Now, they are planning to road-test a framework for thinking about transparency needs in the context of AI in financial markets.

Transparency the key to ethical AI

As discussed in our thought leadership report, Artificial Intelligence in Financial Services: Managing machines in an evolving legal landscape, transparency is a key principle in delivering ethical AI – as well as an area of regulatory focus.

Supporting other regulatory objectives such as fairness and accountability (which, respectively, require transparency to be demonstrated and accurately allocated), transparency in the use of AI solutions is a major consideration for firms. It matters not just as an ethical ideal, but also as a means to deliver regulatory compliance and engender customer trust (and, ultimately, deliver successful products).

Enabling “beneficial innovation” through transparency

In a recent FCA blog post, the FCA and Alan Turing Institute (ATI) have also emphasised the role of transparency – simply, users having access to relevant information about an AI system – as an “enabler of beneficial innovation”. They have also described transparency as a “lens for reflecting on relevant ethical and regulatory issues and thinking about strategies to address them”. 

In particular, transparency is cited as key to:

  • demonstrating trustworthiness and encouraging widespread acceptance of AI systems;
  • enabling customers to understand and challenge the basis of certain outcomes (the FCA and AT cite the example of a sub-optimal loan decision based on an algorithmic credit assessment informed by incorrect information); and
  • allowing customers to make informed choices about their behaviour in full view of the factors that determine outcomes (for example, knowing how credit scores are affected by late / missing payments, or the criteria that influence certain insurance pricing).
A framework for AI transparency

The FCA and AT have set out a proposed high-level framework for thinking about transparency needs in respect of AI solutions. The practical application of this framework is expected to be workshopped with industry and civil stakeholders.
Firstly, when it comes to establishing what is “relevant” information about an AI system, it is suggested that it may be helpful to split such information into two categories:

  • model-related information – the inner workings of the AI model, i.e. the model code and other detail that provides visibility on model input and output relationships; and
  • process-related information – information about the process of developing and using the AI system itself (this may include information on any phase of the system’s lifecycle).
Transparency in practice: the transparency matrix

As well as looking at who should have access to what information – with distinctions made between the requirements for staff, clients, regulators and other parties (e.g. shareholders) – the FCA suggests that decision-makers develop a “transparency matrix”. 

In short, this means that firms go beyond merely asking “what information should be accessible?” (and deploying a one-size-fits-all-stakeholders approach in response). Instead, different stakeholder types are considered independently; and decisions on the information to be made accessible to them tailored based on the following factors: 

  • rationale-dependence – the reasons that drive certain stakeholders’ interest in transparency;
  • stakeholder-specificity – how decisions on the information to be provided may differ between stakeholder types; and 
  • use case-dependence – how such decisions may also hinge on the specific use case.

Using a systemic framework such as this will undoubtedly help firms identify – at a more granular level – myriad transparency needs and respond to them effectively. It may also help firms overcome the “explainability problem” – that explanations are not a natural by-product of complex AI algorithms – as discussed in our recent webinar, Managing machines: AI regulation in finance (available to our clients via the Linklaters Knowledge Portal).

The bigger picture

The FCA and AT collaboration should be viewed in the context of complementary initiatives that are delivering guidance for the ethical use of use of AI at a national and global level. Some of the other key initiatives that will be relevant to financial services-focused work in the UK are summarised below.

U.S. Government Covid-19 funding measures – what is available to Fintech-focused companies?

As a global firm, we have been actively tracking and assessing the varied measures that governments across the world have introduced to support businesses in response to the Covid-19 pandemic. This post is the final and identifies funding measures that may be available in the U.S. specifically to Fintech companies, ranging from small and medium-sized enterprises (SMEs) to start-ups. 

Paycheck Protection Program

As part of the Senate’s US$2 trillion stimulus package, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (read more), approximately US$350 billion initially was allocated for small business loans of up to US$10 million each, to cover certain expenses for up to eight weeks.  Known as the Paycheck Protection Program (PPP), this program is administered by the Small Business Administration (SBA) and involves individual banks and other financial institutions extending the credit, which is backed by an SBA guarantee.

Although, due to high demand, the PPP initially exhausted its funding on April 17, 2020, on April 23, 2020, Congress adopted the Paycheck Protection Program and Health Care Enhancement Act, which was signed into law the next day.  This new law allocated to the PPP an additional  US$310 billion, permitting it to resume processing new loan applications. The PPP is expected to continue to be made available through the end of June 2020, unless its funding is exhausted sooner.

Under the PPP, loaned funds spent on payroll, rent, or utilities could be forgiven if companies retain their current payrolls and satisfy certain other criteria.

  • The PPP is available to companies organized and located in the United States with fewer than 500 employees or that the SBA otherwise considers “small business concerns.” 
  • Under the SBA’s “affiliation rules,” private equity portfolio companies or companies with significant VC investments may be required to look at the number of employees across the PE/VC firm’s whole portfolio (including other portfolio companies) rather than merely their own on a stand-alone basis, depending on the size of the fund investment and any other management rights exercised by the fund. FinTech companies should evaluate their individual circumstances to determine whether the PPP is available to them.
Federal Reserve Main Street Lending Program

In connection with its Main Street Lending Program under the CARES Act (read more), the Federal Reserve will fund a special purpose vehicle (SPV) that will acquire, at par value, either 95% or 85% participation in loans or upsized tranches of existing loans made to companies with fewer than 15,000 employees, or annual turnover of US$5 billion or less, that are organized, and have significant operations and a majority of their employees, in the United States.  In determining whether it satisfies these quantitative criteria, a potential borrower must apply the SBA “affiliation” rules referenced above, and so companies with significant PE or VC investments will need to carefully assess their eligibility for the Main Street Program.

Loans made under the Main Street Lending Program are capped at US$25 million for new loans and US$200 million for upsized loans, and are subject to certain borrower leverage limitations.  While such loans are not subject to forgiveness, they  are competitively priced.  Borrowers under the Main Street Lending Program are subject to limitations with respect to, among other things, their ability to make dividend payments and capital distributions, and conduct stock buybacks.  They are also subject to limitations on certain employee compensation (read more).

For more information, please contact a member of the Linklaters team.

Italian Government Covid-19 funding measures – what is available to Fintechs?

As a global firm we have been actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work, this is the fifth in a series of posts focused on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in Italy (from fully licenced digital banks, to payment providers to tech start-ups). 

Approach taken in Italy

Whilst there are no Italian Government funding measures directly addressed to fintech companies, we note that they may benefit from a range of liquidity support measures tailored to SMEs and even from those targeting larger companies, where they exceed the relevant thresholds:

Central Guarantee Fund for Small and Medium-sized Enterprises (SMEs)

The Central Guarantee Fund for SMEs (CGF), derogating from its current legislative framework, will offer loan and portfolio guarantees on more favourable terms to SMEs and mid-caps until 31 December 2020. In particular, loan guarantees are available on the following terms: 

  • the granting of the guarantee is free of charge;
  • the maximum guaranteed amount per company is increased to €5 million;
  • the guarantee coverage percentages are increased (and are equal to 100% for loans to SMEs falling due between 24 and 72 months and amounting up to €25,000 or 25% of the borrower’s income, if lower);
  • the guarantee applies also to renegotiated loans (subject to conditions);
  • in the event of suspension of payment of the loan instalments or extension of the maturity of the loan by the bank, the existing guarantees of the CGF are automatically extended;
  • the borrowers’ eligibility conditions are relaxed (also with respect to start-ups);
  • the fee for the non-completion of the transaction is removed; 
  • the share of the junior tranche of specific loan portfolios guaranteed by the CFG may be increased; and
  • priority is given to SMEs, including those in the agri-food sector, with registered office or local units located in the territories of the municipalities most affected by Covid-19 identified in Annex 1 of the Decree of the President of the Council of Ministers of 1 March 2020.

Borrowers who before 31 January 2020 had unlikely to pay, past-due or overdrawn exposures – and in any case borrowers who have bad loans – cannot benefit from the CGF measure, while borrowers admitted to certain reorganisation plans or restructuring arrangements after 31 December 2019 are eligible, provided that certain conditions are met.

Loan portfolios guarantees have also been enhanced with similar measures.

SACE guarantees

SMEs which have already made full use of their access capacity to the CGF can apply through the lender for a loan backed by SACE’s guarantee under the Counter-Guarantee Mechanism by SACE and the State, which reserves at least €30 billion (out of €200 billion) for SMEs. The measure encourages banks to provide liquidity to Italian enterprises affected by Covid-19 epidemic by enabling SACE to issue irrevocable first-demand guarantees in favour of banks and other financial institutions which grant loans to Italian companies. SACE’s obligations under the guarantee will be backed by an irrevocable first-demand State guarantee.

SMEs, as well as larger corporates, may access the guarantee scheme provided that on 31 December 2019 they did not meet the European definition of “undertakings in difficulty” and on 29 February 2020 their financial exposures were not classified as “NPEs” (“non-performing exposures”) as defined under European law.

Please note that there is a detailed set of conditions the borrower has to comply with in order to benefit from the SACE guarantee (e.g., loans backed by the SACE guarantees shall be applied to finance costs of personnel, investments and working capital needs in respect of productive plants and businesses located in Italy; the borrower, as well as any other entity of the group incorporated in Italy, shall commit not to authorise dividend distributions or the purchase of treasury shares during the calendar year 2020, etc.). 

Moratorium of loans with a partial government guarantee

Micro-enterprises and SMEs based in Italy which have suffered liquidity shortages as a consequence of Covid-19 and whose financial exposures are not classified as “NPEs” on 17 March 2020 may request a moratorium on specified loan payments and credit lines which will last until 30 September 2020.

Financial institutions which granted the loans/credit lines covered by the moratorium shall be eligible for a government fund guarantee equal to 33% of the relevant amount (which would depend on the type of financing).

Liquidity support by CDP and the Italian government

CDP (Cassa Depositi e Prestiti) will guarantee loans by banks (and other entities authorised to carry out lending activity in Italy), to facilitate market liquidity. In particular, the measure:

  • supports bank financing to companies (including companies which are not considered to be SMEs such as medium-large corporates) that have suffered a drop in turnover due to Covid-19; and
  • operates by (a) the CDP providing specific instruments such as funding and/or portfolio guarantees, including first loss guarantees to the lending banks and (b) the Italian government then granting counter-guarantees up to 80% of CDP’s exposures.

However, this measure still needs to be implemented by way of Decree of the Ministry of Economy and Finance. In the meanwhile, CDP will provide interim relief to enterprises through direct liquidity support up to €2 billion. In particular, the stop-gap support measure:

  • is intended to support temporary liquidity needs, working capital and investments envisaged in companies’ development plans;
  • applies to medium and large enterprises with a turnover above €50 million that have suffered at least a 10% reduction in turnover as a result of the impact of Covid-19, compared to the corresponding period of the previous year; and
  • may also take place in pooling with financial institutions, with a CDP share amounting between €5 million and €50 million and lasting up to 18 months.  
Measures for export credit activities and the internationalisation

SACE will issue guarantees in favour of banks, local and international financing institutions and other entities licensed to carry out lending activity in Italy, in connection with financing to Italian companies and up to an overall maximum amount of €200 billion. The guarantees are issued at market conditions and in accordance with the applicable European legislation and will have the benefit of a first demand guarantee from the State. The measure will be operational following the issuance of the implementing Ministerial Decree.

In addition to this measure, commencing from 1st January 2021, the existing framework for the operation of SACE will be modified. The commitments arising from insurance policies and guarantees for principal and interest in relation to non-market risks shall be assumed through a system of cover jointly provided by SACE and the State: in an amount equal to 10% by SACE and for the remaining 90% by the Italian State.

Read more: Navigating through Covid-19 – Public support schemes for small and medium-sized enterprises.

Singapore Government Covid-19 funding measures – what is available to Fintechs?

As a global firm we have actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work we this is the third in a series of posts focusing on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in Singapore (from SMEs to start-ups). 

Fintech specific measures 

The Monetary Authority of Singapore announced on 8 April a S$125 million support package intended to help position financial institutions (“FIs”) and fintech firms for stronger growth when the threat of COVID-19 recedes and economic activity normalises:

1. Support for Training and Manpower Costs

  • A new Training Allowance Grant has been introduced to encourage firms to train and deepen the capabilities of their employees during this time. 
  • The MAS has also collaborated with the Institute of Banking and Finance (IBF), to offer an increase in course fee subsidies for Singapore Citizens (SC) and Permanent Residents attending relevant IBF courses to 90% (from the current range of 50% to 70%) and extension of the subsidies to include employees of fintech firms.
  • Doubled salary support for FIs to hire SC fresh graduates or workers from other sectors and place them in talent management programs under the Finance Associate Management Scheme. 

2. Support for Operational Costs

Digital Acceleration Grant (DAG)

The DAG scheme supports Singapore-based FIs and fintech firms in their adoption of digital solutions to improve productivity, strengthen operational resilience, manage risks better, and serve customers better. The scheme is open to firms with not more than 200 employees, and is split into two ‘tracks’: 

 DAG – Institution Project track

 DAG – Industry Pilot track


Support for adoption of digital solutions such as cloud services, compliance and KYC tools, and data-related services. 

Support for joint projects by at least three FIs to customise an existing solution with a solutions provider. 

Funding support

Up to 80% of support, capped at S$120,000 per entity, is available for 1 year in respect of the below qualifying expenses:

  • Hardware and software, including licences, maintenance and subscription costs; and

  • Professional services (e.g. consultancy, cybersecurity testing, IT audit).

Entities can claim for expenses incurred from 1 February 2020. 

Up to 80% of support, capped at S$100,000 per participating entity, is available for 2 years from implementation.

Qualifying expenses may include hardware and software, professional services, and manpower costs. 

3. Support for Access to Business Opportunities

APIX free access

Singapore-based fintech firms are granted 6 months’ free access to API Exchange (APIX), an online global marketplace and sandbox for collaboration and sales. 

Fintech Self-Assessment Tool

The MAS will also work with the Singapore Fintech Association (SFA) to set up a new digital self-assessment framework for MAS’ Outsourcing and TRM Guidelines, hosted on APIX. Completing the self-assessment will help fintech firms provide a first-level assurance to FIs about the quality of their solutions. More information on this is expected to be released soon.

Broader measures

Government grants

The following government grants are also available to fintech firms.

  Enterprise Development Grant (EDG) Productivity Solutions Grant (PSG)

Supporting projects that help Singapore companies upgrade their business, innovate, or venture overseas, under three pillars:

  • Core capabilities – helping businesses prepare for growth and transformation by strengthening their business foundations
  • Innovation and Productivity – supporting companies exploring new areas of growth or looking for ways to enhance efficiency (e.g. reviewing and redesigning workflow and processes)
  • Market Access – supporting companies that are willing and ready to venture overseas by defraying some of the costs of expanding into overseas markets.
Supporting Singapore companies in the adoption of pre-scoped IT solutions and equipment to enhance business processes. 
Funding support

80% funding support from April to December 2020. 90% support is available on a case-by-case basis for enterprises most severely impacted by COVID-19. 

Support covers qualifying project costs such as third-party consultancy fees, software and equipment, and internal manpower costs. 

80% funding support from April to December 2020.

The scope of solutions will also be expanded to include COVID-19 business continuity measures such as: 

  • Online collaboration tools
  • Virtual meeting and telephony tools
  • Queue management systems 
  • Temperature screening solutions

Firms must fulfil the following criteria:

  • Be registered and operating in Singapore
  • Have a minimum of 30% local shareholding
  • Be in a financially viable position to start and complete the project. 

Firms must fulfil the following criteria:

  • Be registered and operating in Singapore
  • Purchase / lease / subscription of the IT solutions or equipment must be used in Singapore
  • Have a minimum of 30% local shareholding (for selected solutions only).

German Government Covid-19 funding measures – what is available to Fintechs?

As a global firm we have actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work this is the second in a series of posts focusing on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in Germany (from SMES to start-ups). 

Public support funding measures

The German Government has issued a series of public support funding measures in the course of the Covid-19 crisis, including emergency aid for small businesses, numerous loan schemes of the state development bank “KfW”, guarantees by the federal government and the Federal States, immediate grants offered by the Federal States, the set-up of the Economic Stability Fund (ESF) and most recently its planned support programme for start-ups (read more). 

Some instruments such as the ESF explicitly are limited to companies of the “real economy” which could exclude Fintechs (depending on the level of regulation). However, the KfW loan schemes are not limited to the real economy and should also be available to Fintechs. Nevertheless, Fintechs may not be able to benefit from some of these schemes since, in addition to eligibility criteria to be met with regard to the size of the company, they might not meet criteria relating to the financial liquidity (proof of profit) required before the Covid-19 crisis affected the economy.

Measures for Fintechs

In our view, in particular the following support measures could be interesting for Fintechs:

Emergency aid for small businesses:

To ensure the liquidity of small companies, the German Government offers a one-off payment for up to EUR 9,000 for companies with up to 5 employees and EUR 15,000 for companies up to 10 employees. The exact amount depends on the liquidity needs of the company in question. These funds do not have to be repaid. 

KfW Start-up loan – universal:

The loan schemes of KfW provide access to liquidity for sound and healthy companies, which might, however, be in financial difficulties due to the Covid-19 crisis. Under the KfW start-up loan, KfW will assume a portion of the risk from client facing banks through back-to-back loans.

The criteria for eligibility of the KfW Start-up loan are:

  • The loan scheme is only available to companies that have been on the market for less than 5 years and which have temporary financing difficulties due to the COVID-19 crisis.
  • The companies must not have met the EU definition of “undertakings in difficulty” on 31 December 2019.
  • The loan may be used for investments that promise sustainable economic success, such as operating resources, warehouse, or acquisition of assets from other companies, including takeovers and active participations. The loans may not be used to refinance existing exposures, for follow-up financing or prolongations or to repay drawings on existing credit lines.
  • Companies in which banks have a stake of more than 25% are not eligible. However, companies in which private equity investors have an interest (regardless of the size) are eligible.
  • German companies which would like to benefit from this scheme will be asked to suspend profit and dividend payments for the term of the loan in order to qualify. However, standard remuneration for business owners remain possible.

For SMEs, KfW assumes 90% of the credit default risk, provided that the company has been active for three years. The size of the scheme is generally unlimited, however, the size of the loan is limited to a certain percentage of the companies’ annual revenues / wage costs and to EUR 1bn per group. The specific interest rate depends on the term of the loan, the loan amount, the provided collateral and the specific investment purpose. Enterprises which have been on the market for more than five years could apply for the KfW Entrepreneurial loan, which has similar eligibility criteria. 

KfW Immediate loan scheme:

Further, the German Ministry of Finance has announced the KfW “immediate loan” scheme. Under this scheme, the risk assumption by KfW will be extended to 100%. It applies to companies with more than 10 employees who have been active in the market since 1 January 2019. The eligibility criteria are similar to the ones for the KfW start-up loan. In addition, the immediate loan scheme requires that the company has reported a profit on average over the last three years (or a shorter period if it has not yet been on the market for three years).

Under the immediate loan scheme, the bank receives a 100% risk assumption from the KfW, secured by a guarantee from the Federal Government. The loan is approved without further credit risk assessment by the bank or KfW and can therefore be approved quickly. The amount of each loan is limited to up to 3 months’ turnover in 2019 (max. EUR 500,000/800,000, depending on the size of the company).

Specific support programme for start-ups2:

The Federal Government has decided to invest around €2 billion in a joint fund by way of co-financing (the Corona Matching Facility), to expand venture capital financing so that financing rounds for promising innovative start-ups from Germany can continue to take place. The programme was officially launched on 30 April 2020. According to the Ministry of Finance, the following measures or ‘pillars’ will be implemented under this scheme:

  • Strengthening venture capital investors at fund level:

    – The first pillar aims to strengthen venture capital investors at fund level (through the umbrella funds KfW Capital and the European Investment Fund) to provide additional capital to portfolio companies facing liquidity problems.

    – VC funds may ‘match’ the public resources in a ratio of up to 70% to 30% of the aggregate funding,1 provided that other private investors who do not benefit from the CMF also participate in the respective financing round.

    – A start-up can receive a maximum of 50% of its funding from the CMF, per financing round. The VC funds (and not the start-ups) can apply for the CMF. The successful completion of a due diligence process is a prerequisite for making use of the CMF. 

  • Additional support for other start-ups/SMEs:

    – The second pillar aims at supporting young start-ups and SMEs without access to the CMF, through collaboration with the Federal States.

    – It is intended to provide venture capital through associations of the federal states or through state development institutes so that they can then pass on the funds to start-ups and small SMEs via their network.

    – The risk will be shared between the federal government or the federal states and private investors. Further details on risk-sharing are yet to be provided.

The full eligibility criteria and conditions for these measures have not been published yet. We will provide an update to this post when they are available.

Economic Stability Fund:

The guarantees and recapitalisation measures which can be granted under the ESF are generally limited to large companies which exceed the criteria of SMEs. That said, the recapitalisation measures (including debt and equity instruments) can, at the discretion of the committee of the ESF, be extended to start-ups, provided that these have been valued with at least EUR 50 million in at least one funding round by private capital investors since 2017.

However, the measures will only be granted to companies of the “real economy”. Whilst this term explicitly excludes credit institutions, it is not entirely clear-cut whether partly regulated entities such as Fintechs will also be excluded. In any event, the recapitalisation measures will be granted at the discretion of the committee of the ESF.

1. This proportion of co-funding will be: up to 70% provided by the government through the CMF, and 30% contributed by the private investors.
2. Further details regarding eligibility criteria for SMEs under this pillar of the scheme are yet to be provided.

UK Government Covid-19 funding measures – what is available to Fintechs?

As a global firm we have actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work this is the first in a series of posts focusing on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in the UK (from fully licensed digital banks, to payment and e-money providers and SMEs to start-ups).

Public support funding measures

The government has issued a series of public support funding measures since the start of the Covid-19 crisis in the UK, including the Covid-10 Corporate Financing Facility (CCFF) (read more), the Coronavirus Business Interruption Loan Scheme for SMEs (read more) (and a Large Business variation (read more)) and most recently its innovative start-up measures.

As a general matter, the financing facilities and loan schemes are designed to help the real economy – so non-financial corporates – and a number of criteria apply, varying from scheme to scheme which exclude many Fintechs. Firstly any Fintech which holds a banking licence or is an insurer will be generally excluded from all the government debt financing measures. Secondly those Fintechs which are regulated entities (for example as e-money institutions) other than banks and insurers are also clearly excluded from the CCFF (under which the government purchases commercial paper issued by investment grade, non-financial corporates) which excludes broadly any regulated entity or entity in a regulated group.

In practice, in respect of the CBILs and CBLILs even those Fintechs who are regulated as e-money issuers or payment services providers (so non-banks) or wholly unregulated (and are not thus excluded) will also likely not meet the eligibility criteria as borrowers if they are loss making, as is often the case with the fintech business model.

Measures for licensed banks

Although Fintechs with a banking licence are not eligible borrowers/ issuers under the public support schemes for corporates, the government and regulators have taken a separate set of measures to alleviate pressure from Covid-19 on banks:

  1. First, they can post collateral and get cash under the BoE’s liquidity facilities (the contingent term repo facility for short term funding and the term funding scheme for SMEs for long term funding).
  2. Secondly, the PRA and FCA have taken several regulatory measures to reduce the regulatory burden on banks in these stressful circumstances (e.g. postponing regulatory reporting and onsite inspections and regulatory change) and are taking a flexible approach to capital and liquidity buffers and the capital treatment of loans under payment moratoria and covenant breaches.
Innovative start-up funding measures

Otherwise the more recent innovative start-up measures may be of more interest as these are intended to plug the funding gap for genuine start-ups that are pre-profit and would generally be equity funded. These were announced on 20 April in the form of the “Future Fund”, a new scheme in partnership with the British Business Bank under which the government will issue “bridge funding” in the form of convertible loans between £125,000 to £5 million to innovative, high growth VC-funded companies which are facing financing difficulties due to the coronavirus outbreak (read more).

Key aspects of the Future Fund scheme

The purpose of the Future Fund is to support businesses that have been unable to access other government business support programmes, such as CBILS, because they are either pre-revenue or pre-profit and typically rely on equity investment. Fintechs looking to take advantage of the Future Fund scheme should note the following:

  • The scheme is open to UK registered, unlisted firms which have a substantive presence in the UK. 
  • Borrowers need to demonstrate they have raised at least £250,000 in private funding over the last 5 years and have co-investors which can at least match the state-backed loans with private investment.
  • The funding takes the form of a convertible loan with a maturity of 3 years. Structuring as a convertible loan avoids having to assess the start-ups valuation during the crisis. 
  • On maturity the loan shall either: 

    (i) be repaid by the company with a redemption premium (equal to 100% of the principal of the bridge funding) or 

    (ii) automatically convert into the most senior class of equity share at a 20 per cent discount to the valuation set in the borrower’s next funding round (assuming the borrower manages to secure funding at least equal to the amount of the bridge loan). 

  • The 20% discount on conversion would clearly be significantly dilutive for the existing shareholders and accordingly encourages repayment. 
  • Repayment terms are however onerous: the loans will attract interest at eight percent interest rate, payable together with repayment of 200% of the principal at the maturity date of 3 years. 
Accessibility of the Future Fund to Fintechs 

Given the relatively small amount of funding that is being made available through the Future Fund, the initiative seems to be aimed at the smaller end of the market. It may be relevant to angel/VC funded start-ups, including Fintechs, which would not be eligible borrowers under the other loan schemes.

The conversion and repayment terms attaching to the loans may make them unattractive to start-ups that have business models sufficiently robust to seek funding from alternative sources (e.g. their existing shareholders). 

As the full eligibility criteria have not yet been published it is unclear whether there will be any exclusions for banks or other financial sector entities similar to the CBILS/CLBILS. At this stage, there are no such exclusions and it appears that the apparent purpose of this scheme is to boost innovation. 

The Future Fund will launch for applications in May 2020 and will initially be open until the end of September 2020.

Smaller businesses focused on research and development can also apply grants and loans from Innovate UK, the national innovation agency for a new pot of £750m in grants and loans. The majority will be available to its 2,500 existing customers and the first payments being promised by mid-May.

We will update you as more details become available.