THE UK FINTECH

MARKET

Agenda

1. Welcome and introduction of the DIT Financial Services

2. Regulation of the UK Financial Sector

3. The impact of regulation on the FinTech sector

4. UK Regulatory Initiatives

5. FinTech bridges

6. Impact of Brexit on FinTech

7. Q&A

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What we do

The DIT – Financial Services team supports and promotes the UK

financial and professional services industries focusing on:

• FinTechs

• Insurance & Reinsurance

• Asset Management

• Legal and Professional Services

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How we do it

Matchmaking services

Legal SupportPolitical/Economic analysis

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Department for International Trade (DIT) Webinar

The UK FinTech Market

20 January 2017

Harry Eddis

STRICTLY CONFIDENTIAL

Regulation of the UK Financial Sector

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Regulators and Regulations – Europe & UK

•FSMA

•Regulated Activities Order

•FCA/PRA Handbooks

•PSRs

•Consumer Credit Act

•MiFID

•EMIR

•CRD/CRR

•AIFMD

•PSD

•Consumer Credit Directive

•Bank of England

•PRA

•FCA

•Payment Systems Regulator

•European Commission

•ESMA

•EIOPA

EU Regulators

UK Regulators

UK Regulation

EU Regulation

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UK Regulatory Framework

> FSMA 2000 is the key statute (with some key changes in Financial

Services Act 2012) with a number of statutory instruments

> The General Prohibition - Firms carrying out a “regulated activity in the

UK must be authorised or exempt from authorisation” (section 19

FSMA)

> An activity is a regulated activity in the UK if:

1. It is an activity of a specified

kind

3. It is carried on by way of

business

2. (For most activities) it relates to

an investment of a specified kind

4. It is carried on in the UK

5. No exemption is available: a wide range of exemptions may be available for certain activities or certain persons (e.g. purely intra-

group activities are typically exempt).

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Regulated Activities and Investments in the UK

Typical Specified Investments Typical Specified Activities

Deposits Accepting deposits

Shares Dealing in investments as principal or agent

Debentures Arranging deals in investments

Units Custody of investments

Warrants Advising on investments

Certificates Sending dematerialised instructions

Options Operating a multilateral trading platform

Futures Operating a collective investment scheme

Contracts for Differences Administration of insurance contracts

Insurance Policies Entering into regulated credit agreements

Mortgages and consumer loans Entering into regulated mortgage contracts

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Who is an authorised person?

> If not exempt, authorisation is required (otherwise offences in FSMA, leading to fines and/or imprisonment)

> “Authorised person” is a firm which has a “Part 4A permission”

> Apply to appropriate regulator:

> Public register of authorised persons (https://register.fca.org.uk/)

PRA

Insurers

Banks

Designated investment firms

(“Dual-regulated firms”)

Assessed by PRA from prudential

perspective and FCA from

conduct perspective

PRA requires FCA’s consent

FCA

Other firms

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Consequences of regulatory authorisation in the UK

> Bound by Rules and Guidance set out in FCA Handbook (arranged in Sourcebooks and Manuals)and, if applicable, PRA Rulebook

> Subject to oversight (and possibly inquiry and enforcement action and related sanctions) by the FCA and, if applicable, the PRA

> Regulatory rules and supervision in relation to the following modules (not exhaustive):

Conduct of

Business

Systems and

Controls

Prudential

Requirements

Fitness and

Probity

Custody of

Cash/AssetsMarket Abuse

Regulatory

Reporting

Training and

Competence

Impact of Regulation on UK FinTech Sector

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London as a FinTech Hub

Source: Deloitte, “The Connecting Global FinTech: Hub Review 2016”

London has the world’s largest

financial services sector,

supported by a booming tech

sector. The ecosystem has the

“Fin” of New York, the “Tech” of

the US West Coast and the

policymakers of Washington, all

within a 15 minute journey on

public transport. These factors

make London one of the

greatest connected global cities

in the world with the key

ingredients for digital success:

capital, talent, regulatory and

government support and

demographic diversity.

“

”

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What is the role of financial regulation in the growth of

FinTech?

> Challenges to traditional regulation and the UK’s FCA response

> Traditional regulation of financial services is being challenged

> Regulators have to reconcile how to apply existing regulation to new products and services likely not event contemplated when the regulation was drafted (bearing in mind its statutory objective to protect consumers)

> Whilst promoting competition (another of its statutory objectives) and fostering innovation

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How is FinTech Regulated in the UK

FinTech itself is not subject to a specific regulatory regime

Law/regulation applies to FinTech solutions in the same way as it does to non-

FinTech solutions

Therefore, if a firm used FinTech as a platform for carrying out a regulated

activity in the UK in relation to a specified investment, that activity will be

regulated and the firm will need a licence to carry out the activities

So, for example, a firm that establishes a FinTech system to record ownership of

properties would not be regulated as properties are not specified investments

and the firm would not be carrying out a regulated activity (see above)

However, a FinTech-based platform for dealing in shares or bonds would involve

the carrying on of regulated activities and firms involved would need to assess

whether they need a licence

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Fintech – is law/regulation a help or hindrance?

BUT: what of law and regulation?

• law/regulation is generally written on a backward-looking basis

• law/regulation can take time to catch up

• There can be a benefit to being regulated: e.g. reputation

• Client-facing vs pure support services?

So: what are some of the key legal/regulatory barriers?

• the requirement to be authorised to provide investment services

• legal enforceability (e.g. smart contracts)

• regulatory priorities

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Potential for regulatory change…

FCA focus on Financial Innovation

Innovation Hub

Regulatory sandbox

HMT Consultation Paper on draft innovation for financial services

Consultation on whether UK regulatory environment effectively supports innovation

Bank of England Digital Currency Team

Currently researching possibilities of central bank virtual currency

ESMA Discussion Paper

Examines potential impact of distributed ledger technology on the securities market

Analogies

Crowd funding

Electronic Signatures Regulations 2002

UK Regulatory Initiatives

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FCA Project Innovate

This FCA project commenced in October 2014 and assisted 175 firms with development

FCA provides direct support and early engagement with innovative firms in the sector

E.g. WealthKernel used the Innovation Hub to develop its automated wealth management solutions business

Criteria for support: genuine innovation, consumer benefit, background research and need for support

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FCA Regulatory Sandbox – Background

Launched spring 2016 as the next step of Project Innovate

The sandbox allows for the testing of innovative products in a safe space:

Reducing time to market

Better access to finance

Waivers or modification of rules

The FCA provides individual guidance and develops safeguards

First cohort closed on 6 July 2016.

24 successful applications out of 69.

Application deadline for cohort two was 19 Jan 2017

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Regulatory Sandbox – Participation

Applications must demonstrate the following criteria:

Significant UK nexus

Genuine innovation

Consumer benefit

Need for sandbox testing

Evidence of background research

Readiness for testing in live environment

Testing on each project will be conducted for 3-6 months

There will be ongoing monitoring and weekly reporting to the FCA

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Regulatory Sandbox – Cohort One Examples

Firm Description

Billon An e-money platform based on distributed ledger technology that facilitates the secure transfer and holding of

funds using a phone based app.

BitX A cross-border money transfer service powered by digital currencies / blockchain technology.

Blink

Innovation

Limited

An insurance product with an automated claims process, which allows travellers to instantly book a new ticket

on their mobile device in the event of a flight cancellation.

Bud An online platform and app which allows users to manage their financial products, with personalised insights,

on a single dashboard. Bud's marketplace introduces relevant services which users can interact with through

API integrations.

Citizens

Advice

semi-automated advice tool which allows debt advisers and clients to compare the key features of available

debt solutions.

HSBC An app developed in partnership with Pariti Technologies, a FinTech start-up, to help customers better

manage their finances.

Otonomos A platform that represents private companies’ shares electronically on the blockchain, enabling them to

manage shareholdings, conduct bookbuilding online and facilitate transfers.

SETL A smart-card enabled retail payment system based on their OpenCSD distributed ledger.

Tramonex An e-money platform based on distributed ledger technology that facilitates the use of “smart contracts” to

transfer donations to a charity.

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Bank of England FinTech Accelerator

Launched June 2016 by Mark Carney

The Bank will work in partnership with FinTech firms to develop new approaches to the delivery of the Bank’s mission and operations

The Bank will appoint FinTech firms to run short Proof of Concept projects in a number of areas, including blockchain

Two cohorts of firms have been selected

Applications for next cohort will open in Spring 2017

Areas of priority for the Bank are:

Metadata management tools

New tools to manage and harvest business rules (including rule languages) that are embedded in systems

Security tools that protect data at rest and in transit

Innovative tools for data cleansing, for example for text strings, and anomaly, trend or changing behaviour detection, particularly in transaction reporting data sets

Competitive and transparent selection process based around a Proof of Concept designed by the Bank.

No requirement for firms to be based in the UK

FinTech Bridges

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FinTech Bridges

Co-operation agreements between regulators aimed at:

Encouraging foreign direct investment flows in FinTech between two countries

Improving information flows between regulators

The UK has currently signed co-operation agreements with:

Each co-operation agreement subject to negotiation between the FCA and local overseas

regulator so will be framed differently

UK government commissioned EY report on opportunities for FinTech investment in China and

the UK in advance of the co-operation agreement

ASIC MAS PBCFSC HKMA

Impact of Brexit

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Brexit: Timing

UK voters decide that the

UK should leave the EU

23 June 2016

EU referendum:

‘Should the United

Kingdom remain a

member of the EU or

leave the EU?’

A vote to leave does

not equal immediate

departure: No

immediate impact on

legislation, although

government will have to

decide:

a) when to serve

withdrawal notice

b) its withdrawal

negotiation

objectives

Article 50 notification: No

provision on timing of serving

withdrawal notice.

Constitutional issues?

March 2017?

2-year negotiation period

of the terms of UK

withdrawal: could be

extended only by

unanimous agreement of all

Member States.

Withdrawal agreement (or

agreements) signed.

Still negotiating (with

approval of all Member

States)

or

New arrangement in place

March 2019?

or

No agreement. All treaty

rights and obligations

lapse. WTO terms apply.

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Brexit: Challenges and Opportunities for Fintech

Challenges

Impact of uncertainty on investment

Risk of London losing ground as financial

centre?

Increased protectionism in the EU?

Loss of access to EU’s 400+ consumers?

Increased competition from outside EU?

Restrictions on freedom of movement and

access to talent?

Loss of access to key EU FMIs (e.g. Target

2)

Opportunities

Opportunity for bespoke FinTech regulatory

regime and a reduction in regulatory

complexity

Increased global trade with non-EU

countries?

Ability to offer incentives to FinTech sector

(e.g. tax incentives, subsidies etc.)

New immigration system may look

favourably on high-tech talent

London will continue to be a global financial

centre

Increased demand for innovative solutions?

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Questions?

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Linklaters LLP

One Silk Street

London EC2Y 8HQ

Tel: (+44) 20 7456 2000

Fax: (+44) 20 7456 2222

Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or

consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its

registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. This document contains confidential and proprietary information. It is provided on condition that its contents are kept confidential and are

not disclosed to any third party without the prior written consent of Linklaters. Please refer to www.linklaters.com/regulation for important information on our regulatory position.

Contact

For further information or questions, please contact our team:

Chetna Patel | Head of Financial Services Latin America |

Department for International Trade |British Consulate-General São Paulo

Tel: +55 11 3094 1883 | E-mail:chetna.patel@fco.gov.uk

Tássia Frade | Business Development Manager - Financial Services |

Department for International Trade | British Consulate-General São Paulo

Tel: +55 11 3094 2755 | E-mail: tassia.frade@fco.gov.uk

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