In May this year, a crash in crypto prices wiped out over $300 billion of value in one week, igniting fears that the runaway development of crypto could cause a global financial crisis. 

That the crash was triggered by the implosion of a ‘stablecoin’, TerraUSD, caused particular concern. Stablecoins are so named because they are linked to low-risk assets, but TerraUSD’s peg to the US dollar was via another cryptocurrency, Luna – and when the market lost faith in Luna, it took down TerraUSD, along with the confidence of many crypto investors. 

At the same time, in early June Japan became the first major economy to introduce formal regulation on stablecoins, legally defining them as digital currencies. 

Should there be a clamp down on crypto?

Or can it still become a catalyst for positive change if proper measures are implemented? There are strong calls on either side. 

Last year, China banned all crypto transactions, citing crypto’s role in facilitating financial crime and the risk its speculative nature poses to the country’s financial system. In February, the deputy governor of India’s central bank T Rabi Sankar stated “banning cryptocurrency…is the most advisable choice for India.” Most recently, American billionaire businessman Charlie Munger, applauded China’s move to ban crypto, calling for the same to be done in the US.

Crypto concerns are valid

The anonymity of cryptocurrency transactions allowed it to be used for money laundering and financing illegal activities, as well as in Ponzi schemes and other kinds of fraud. Earlier this year, US Senator Elizabeth Warren raised concerns that crypto could also be used by Russia to circumvent economic sanctions.

At the same time, crypto has the potential to bring in major benefits. Lower transaction costs can facilitate micropayments, while smart contracts reduce banking fees, revolutionising financial inclusion, especially in developing and emerging-market countries. “Globally, privileged, developed and free societies account for only 20% of the global population. Crypto provides an alternative economic system that enables greater financial empowerment and independence,” states policy analyst Evin Cheikosman. Others like Alpen Sheth of Mercy Corps Venture highlight crypto’s technological significance, for example how cryptocurrency networks “provide a new paradigm for secure data and value transmission”.

But whatever your position, considering a full ban on cryptocurrencies possible at this stage is wishful thinking. They are already an established feature of the global financial landscape. In 2021 alone, 16% of Americans and 10% of Europeans invested in crypto-assets, and the first Bitcoin exchange-traded fund was launched in the US. Even after the recent crash, the global cryptocurrency market is worth over $900 billion by some estimates. In other words, the genie is out of the bottle.

Suppressing cryptocurrency now would only drive the market underground

Or into jurisdictions where its negative uses would thrive. 

Instead, there should be effective, global regulation implemented to take full advantage of the benefits of this emerging technology. And while cryptocurrency is on the frontier of innovation, looking at past mistakes can be instructive.

This is not the first time the global financial system has faced uncertainty and issues when faced with new asset types. Non-regulated Collateralised Debt Obligations (CDOs) which became notorious as a leading cause of the 2008 financial crisis are one example. Over-the-counter (OTC) derivatives, which are financial contracts that do not trade on an asset exchange, were another instrument found to play a role in the crash. In 2010, regulation of OTC derivatives was brought in with then European Commissioner for Internal Market and Services Michael Barnier stating, “no financial market can afford to remain a Wild West territory”. 

But in the case of both OTC derivatives and CDOs, regulation came after the crash. This time around, regulators seem to be determined to put effective regulation in place before crypto can cause a global financial crisis.

Regulation to prevent crisis

Fabio Panetta, Member of the Executive Board of the European Central Bank, pointed out in April that the crypto market was larger than the $1.3 trillion sub-prime mortgage market which triggered the 2008 global financial crisis. “Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society,” he said.

Major crypto market players also accept the inevitability of regulation and want to play a part in its development. Changpeng Zhao, CEO of Binance, the world’s largest exchange for trading Bitcoin and other cryptocurrencies, said recently that it is time for regulators and industry players to work together to develop effective, global, fit-for-purpose regulation.  

Conclusion

The debate surrounding cryptocurrency is too often polarised between advocates and detractors. What is clear is that crypto brings in new possibilities but also familiar problems. The latest crash in the global crypto market should serve as a serious warning for governments, investors and the fintech sector to bring in comprehensive regulation. We must learn from past mistakes in order to realise cryptocurrency’s full potential and protect our financial system from a crisis. 

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Presently, crypto assets are largely unregulated throughout the world, with the national operators in the EU only expected to demonstrate controls for tackling money laundering.

This has led representatives from the European Parliament and EU states to iron out a deal on the markets in crypto assets (MiCA) law. This will likely come into effect around the end of 2023. 

"Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market," commented lawmaker Stefan Berger. "The recent fall in the value of digital currencies shows us how highly risky and speculative they are and that it is fundamental to act.”

MiCA, as the first comprehensive system for crypto-assets in the world, will contain strong measures to prevent and fight market abuse and manipulation. Other major crypto centres, including the US and UK, are yet to give similar rules the green light. 

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The Financial Conduct Authority (FCA) reported a tripling of lending to customers in 2020 alone. It is surely one of the notable positives out of restricted movements during the pandemic. But it is not just about ubiquity and lending growth. It is also the poster child for innovation in retail finance. BNPL shows us all what is possible when technology, e-commerce and consumer needs are matched well. What’s not to love?

An unregulated landscape

BNPL sits in a class of agreements between parties that is quite vast such as invoicing and gym memberships. As such it is largely unregulated and has been deliberately exempt from consumer credit laws and regulations. The decision to exempt it, some fifty years ago, was sensible at the time as the majority of these types of arrangements posed little risk. But unlike most of those traditional arrangements, BNPL is plain and simple, lending. It may appear to only separate the timing of purchasing goods or services from repayment, but it is a contractual agreement to make repayments, and it can lead to interest, and fees being charged. 

BNPL has the potential to overcommit the customer and cause harm if not conducted well. Therefore, being unregulated seems a little at odds with what most people might expect today, against a backdrop of increased consumer protections that focus on reducing detriment and harm from lending. Looking at how BNPL has evolved over these last few years, it feels that regulation and coverage by law are necessary and timely. 

Change is afoot

The industry is bracing itself, even pre-empting what might happen with BNPL, in order to get in front of it. The FCA led a detailed review of practices in unsecured credit – The Woolard Review. This review identified BNPL as being different from other forms of arrangements, exempt from consumer credit laws and regulated activity, and as presenting a high risk of consumer detriment.  Key areas of concern are around how it is used, promoted, understood, and whether good practices are in place to manage the risks and harm to customers. The FCA recommended it be brought within its perimeter of conduct rules, and the Treasury is consulting on making statutory changes that will remove current exemptions. 

In a sign of what is to come, the FCA has taken a pre-emptive strike on the main providers. Showing an intent to exercise its full powers, it recently issued publicly the findings of a review of the four largest providers of BNPL loans covering compliance with consumer contract regulations and consumer rights. It raised concerns in respect of contractual terms that were considered unlikely to comply with the rules. According to the FCA, the four providers involved have been ‘fully cooperative’ and ‘agreed’ to changes, including for some, a voluntary refund of inappropriately charged fees. 

Providers are pretty savvy though and it seems clear where this will likely end up – not too dissimilar from other forms of lending. Many providers are revising terms, providing new options for payment at the point of sale and creating more prominent messaging and options. Their internal practices are also sharpening up. Providers are strengthening their credit risk controls – adopting good practices in line with more traditional lending products (and providers) in assessing customer indebtedness and ability to afford repayments, as well as better overall management of their credit risks. 

However, it is important to note the requirements are not certain. The questions, as the Treasury put it, are – what is to be included within the scope (that is, what is no longer to be exempt) and what controls need to be in place to manage this. Their conundrum, remembering that BNPL looks and feels a lot like other types of arrangements, is: cast the statutory net too wide and they risk including arrangements that do not require such attention and may have unintentional ramifications on a wide range of practices. But, cast it too narrowly, and it is easy for providers to avoid any requirements by slightly tweaking their products and practices. 

Unregulated BNPL is becoming significant

Short-term interest-free credit used to purchase more substantial items (as labelled by the Treasury and FCA) is not what the lawmakers and regulators are concerned with – it is not what is growing rapidly or causing detriment to consumers. The focus of their attention is what they call unregulated BNPL agreements, which typically target lower value items, often non-essential and fast consumable items like clothing. This is big and growing with estimates of over £5 billion last year, and projections into the tens of billions by some analysts.

There is potential for BNPL to be much, much bigger

If the wider market foray into BNPL continues, it will likely cannibalise existing lending, particularly of credit cards, but it may also increase spending levels overall. Should BNPL purchases shift upward in value, this will see total exposures grow quickly. Individual online retail shopping amounts for BNPL are relatively low. But aggregating spending over multiple purchases for a customer mounts up. If purchases shift to more substantive goods – the territory of short-term interest-free items mentioned previously - it will account for a sizeable chunk of the quarter trillion-pound unsecured market. Having the largest BNPL providers sit outside the regulatory perimeter, or inconsistent practices between lenders, undermines the whole unsecured market. 

The outlook for BNPL providers

Analysis by Redburn, as reported in the FT, suggests BNPL providers that only offer this product are unlikely to be sustainable in the long run. Whilst they look attractive today, they will soon be outgunned by incumbent lenders. However, those able to deepen their offerings and relationships with a broader suite of products and services will see sustainable value, leveraging BNPL as an effective acquisition generator for new business. 

This reinforces a further point, that the type of customer who is attracted to and uses BNPL now is younger and without a credit history. Yes, BNPL may be  positive for greater financial inclusion, but it also points to a possible vulnerable customer group who are less aware, less financially astute, less resilient, and so more susceptible to harmful practices.  

Providers should therefore aim to build on that foundation with a very clear long-term perspective. A view that covers decades not just the next few years, this is how BNPL can become the backbone of how people spend on low to moderate purchases when requiring credit. 

About the author: Phillip Dransfield is Partner at 4most, a UK based, credit and life insurance risk consultancy and is recognised internationally as one of the most dynamic and successful risk consulting firms.  

The European Commission recently published a proposal that aims to govern the conduct of financial service providers that deal in cryptoassets. The Markets in Crypto-Assets Regulation (MiCA) is defined as a framework of measures that will be implemented to enable and support digital finance in regards to innovation and competition while mitigating risk for all stakeholders. Work on this regulation framework began in 2018 with the end goal of harmonising the EU’s efforts towards regulating currently out-of-scope cryptoassets.

Instead of disregarding the innovation and rising popularity of cryptoassets, the European Commission has been exploring ways through which they can embrace the digital transformation that is currently taking place in economic markets worldwide. The implementation of MiCA is part of a bigger legislation process under the digital finance package, which consists of proposals around cryptoaassets. The main aim of the digital finance package is to facilitate creation, competitiveness and access to innovative cryptoaassets for trading services customers in Europe while ensuring financial stability and customer protection.

A summary of the regulatory objectives

The proposal also intends to create an environment that will foster innovation around cryptoaassets rather than installation of retrogressive guidelines that will stifle the rise of new technologies. Because there has been increasingly independent policing within European countries, it was necessary for the EU to step in and regulate the digital currencies markets.

What is being regulated?

MiCA intends to regulate every digital representation of value which has the capability of being shared using Distributed Ledger Technology (DLT), disregarding financial instruments that are deemed out-of-scope for existing regulatory framework such as MiFID and EMD. They should fall under the below categories:

• E-money tokens – cryptoassets with a stable value that is based on only one fiat currency whose purpose is to serve as electronic money would. Examples of these are Libra, Euro and USDC.
• Utility tokens – which are issued under a non-financial basis for the purposes of providing a third party with access to a predetermined resource or service. An example of this is a FileCoin Token.
• Cryptoassets – for example Bitcoin, Litecoin and Ripple.
• Asset-reference tokens – whose purpose is to maintain a stable value by referencing one or more currencies that are legal tender such as fiat currency. They can be used as a store of value or a means to purchase goods or services. An example of this is Libra Basket Coin.

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What are the new rules that apply to cryptoassets?

Under these proposed regulations, a Crypto-asset Service Provider (CASP) is defined as an entity that is involved in the provision of cryptoasset services to a third party on a professional basis.

Issuers of the cryptoassets are required to publish a definitive white paper and send it to the relevant financial services regulator for review and approval for example the BaFIN in Germany. The issuer of the cryptoasset can only proceed if the proposal is approved.

Service providers that deal with cryptoassets will also be required to seek approval from the relevant regulators in the jurisdiction in which they operate. The regulator requirements include things like minimum capital reserves, security of the infrastructure on which the cryptoasset is offered and corporate governance.

Of course, MiCA also spells out its position regarding issues that affect trading in securities such as insider trading and market manipulation.

Trailblazing in the EU

In essence, MiCA is taking the unbeaten path when it comes to regulation of crypto-assets. While some countries are banning these types of assets, it is commendable to see that the European Union is interested in fostering an environment that will promote innovation and still protect stakeholders. The intended result is to create a transparent and harmonised European crypto-asset market that invites global investors and customers to participate.

A major new report on the UK’s fintech sector has found that, while the UK continues to lead in fintech, according to a long-awaited government-backed review of the sector.

The 108-page Kalifa Review, released on Friday, lays out a five-point plan for the continued development of fintech in the UK. The review was commissioned in 2020 to identify priority areas to support the UK fintech sector.

The report recommends the creation of a fintech growth fund, allowing UK pension funds to invest in early stage companies and disincentivise them from quickly selling to wealthy foreign competitors. It also recommends that a retraining programme be set up to encourage further education colleges to help workers understand new tech skills.

Further recommendations include the development of ten new fintech “clusters” across the UK and the establishment of a Centre for Finance, Innovation and Technology to coordinate and encourage growth across the sector.

Ron Kalifa OBE, former head of payments firm Worldpay, warned that the UK attracted only 4.5% of new financial company IPO listings between 2015 and 2020, falling far behind the 39% that floated on Nasdaq and the NYSE.

“Britain has a proud record of starting-up and scaling-up some of the best known fintech products, but we cannot rest on our laurels," Kalifa warned in a statement. "The next powerhouses will not be created by accident.

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"We must continue to nurture our start-up culture, but crucially we must also give our high growth firms the support to become global giants."

After the 2008 financial crisis, fintech emerged as one of the UK’s most fast-expanding industries. It is now worth £11 billion and accounts for 10% of the global market, with high-profile London-based firms such as Monzo, Revolut and Checkout.com making the capital an international hub for fintech.

Success in forex trading is not easily achieved. This venture, indeed, isn’t the get-rich-quick affair that many play it out to be.

If you’ve been around the currency world for quite some time now, you’re probably aware that there are actually more losers than winners. This is a fact that we all have to accept. But don’t take this as a discouragement. In fact, you could really earn a lot of money trading forex, but it’s quite a challenge to actually start making consistent profits. It takes dedication, commitment, and hard work to be able to thrive in the forex market.

As discussed in our other articles, anyone seeking to access the world's largest financial market must have a good forex broker, who will provide you with a trading platform where trades are carried out. If you are living in the United States you should choose the best company for your needs among the short list of popular forex brokers. Not all of them have the highest leverage. Forex brokers are an important part of your trading career. They can make you, or break you down.

It can’t be denied that just like other financial markets, the forex market is filled with scams, and forex scams come in various forms. These scams have given trading a bad name, with many still questioning the feasibility of making profits in it.

The Role of a Forex Broker

As mentioned, if you’re willing to put in effort, hard work, and commitment, you can be a successful forex trader. As they say, your success is in your hands. But you also have to understand that everything will be put to waste if you’re trading with the wrong forex broker. You may be putting in a lot of hard work perfecting your trading strategies and developing your money management skills, but if your broker doesn’t provide you quality trading service, you can go nowhere.

A good broker wants you to succeed, and they will help you to be successful by providing only the best trading service possible. It’s sad to say, though, that not every forex broker can be trusted nowadays. Now you’ll probably ask, “What really makes a good broker?”

A good broker wants you to succeed, and they will help you to be successful by providing only the best trading service possible.

Check Regulation

When choosing a forex broker to invest your money in, regulation should be your top priority. Regulated brokers mean they’re licensed to provide forex trading services. This also means certain authorities are overseeing the operations of brokers, making sure that they’re following guidelines and measures set by them.

In addition, working with a regulated broker gives you the upper hand, because you can file a complaint directly with their regulator against them. Some prefer to deal with forex companies which hold licenses from reputable agencies such as the Financial Conduct Authority of the UK and the Australian Securities and Investments Commission of Australia.

Most forex brokers display their license numbers on their website for transparency. Just go to their regulator's website to check if they’re really registered entities.

Read Reviews Online

Aside from checking forex regulation, you may also consider looking for Forex brokers reviews online by traders who have used specific brokers. Doing so will give you insights on how they do business. You can find a lot of review websites dedicated to forex trading, so take advantage of this. It’ll be good to gather as much information as you can about different brokers. If brokers have more negative feedback than positive, this may be a sign to stay away from them.

In reading reviews, you can find reviews about their spreads, trading platforms, withdrawal, and execution. These should allow you to grasp the kind of service brokers provide to their clients.

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Start trading currencies

Trading forex provides huge potential for wealth growth. But before you get too excited jumping into the trend and throwing in loads of money, you have to do some thorough research first. It is a sad reality that this industry is suffering a lot of fraud. There are way too many opportunists lurking around the market, and these could be forex brokers themselves. Do a big favour to yourself - adopt the above tips not to be a victim. Look for a well-regulated broker that ensures the safety of your funds, and provides top-notch trading services. It also doesn’t hurt to check online reviews about brokers straight from other traders.

Finance Monthly hears from Nic Sarginson, Principal Solutions Engineer at Yubico, on emerging trends in data security that may soon be coming to financial services.

This past year has prompted a rise in take-up of digital banking services. As people stayed at home they went online to work, shop, stay in touch and manage their money. While this shift to online banking presents an opportunity to service providers with a digital-first approach, it also presents a target for cybercriminals intent on profiting from data breaches and account takeovers. Banks and their customers are adapting to a new, remote, relationship; as they do, the strength of online security protection will become a greater talking point and, for some institutions, even a source of competitive advantage.

According to some reports, as many as six million people in the UK made the switch to digital banking in March/April last year. Customers setting up their accounts will have created a password/PIN to use with a user ID to gain access. This form of authentication will be familiar from other log-in services; what may be less so is the additional strong customer authentication (SCA) check, such as a one-time passcode generated by a card reader or sent as a text to a registered mobile phone.

Password weaknesses

This second line of defence is incredibly important for financial services, as passwords are notoriously weak at preventing bank account takeovers. Reused passwords render multiple accounts vulnerable should a data breach put this information into the hands of cybercriminals. Passwords can also be guessed with a range of common word and number combinations in use, and bank details are some of the most coveted data breach spoils.

Additional ID checks therefore boost security, but not all forms of stronger authentication are completely resistant to security threats. Mobile-based one-time codes that are so popular with banks, for example, can be vulnerable to SIM-swap and modern man-in-the-middle (MitM) and phishing attacks.

According to some reports, as many as six million people in the UK made the switch to digital banking in March/April last year.

During a MiTM attack the innocent party believes they are communicating with a legitimate organisation, such as their bank, but in reality information is being intercepted and relayed by a malicious third party. It isn’t easy to recognise this type of attack, even for the cyber savvy, as attackers create personalised and convincing communications to trick their targets. Routes in can include unprotected Wi-Fi and manipulated URLs.

In the more widely known phishing attack, people are tricked into parting with personal information such as login details. Phished credentials are then used to gain access to the user’s account and may be tried against other services as part of a multiple account takeover.

Managing the customer experience

For financial services, the strongest possible authentication to protect data and accounts does not always marry with the best customer experience. Each additional check can add time and frustration to the log-in experience, preventing customers from accessing their accounts whenever they want to – if, for example, they are in a mobile-restricted location.

Strong authentication therefore must meet the dual requirement of protecting account details and financial and personal information, while also providing a convenient, preferably frictionless, user experience. Added to that is another consideration - how simple it is to integrate additional authentication into back-end systems for both the existing product portfolio and future innovations. With the rate at which financial services are digitising, and payments moving cashless, this is a challenge most banks will find concerning. The finance industry is also faced with the critical need to ensure compliance with various industry regulations including GDPR, PCI DSS and PSD2 mandates that govern access to sensitive data.

Protecting corporate infrastructure

Financial institutions must also protect access to their own systems and applications. Here, the challenge is exacerbated by the fact that most banking infrastructures are a mix of legacy on-premise systems, and private or public cloud-hosted services. They must all be protected against unauthorised access, a challenge that has been heightened by the rapid transition to large-scale homeworking of the past year.

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Finance teams and employees working from unfamiliar locations expand the potential attack surface with home networks and personal devices suddenly a part of a bank’s corporate IT estate. Seamless, convenient and high-assurance multi-factor authentication (MFA) must be in place to protect data and corporate assets so that employees can securely access systems remotely without introducing new risks and vulnerabilities.

Financial services are starting to embrace hardware-based tools such as security keys as a route to strong authentication, which protects business and customer data without inconveniencing increasingly impatient financial customers. When it comes to their financial data, users appreciate authentication devices being something they have, as opposed to something they know, to protect against phishing attacks. For customers, they provide protection for accounts, while in the corporate setting they can secure access to systems and applications. Whether tasked with upgrading a bank’s legacy infrastructure, or a new generation of fintech developers operating solely in the cloud, such an approach can offer seamless integration with operating systems, and conformance with global authentication standards.

If the finance industry is to effectively protect customers and customer data while providing the user experience that today’s consumers expect, they must look beyond basic protection methods to provide strong yet frictionless authentication. It’s shocking that social media accounts are often more secure than bank accounts as of today. Since consumers are increasingly exposed to better protection elsewhere, they'll soon be demanding the same security assurances for their bank account.

Dion Travagliante, Head of North America at Hoptroff, outlines the importance of MiFID II compliance in ensuring UK firms remain internationally recognised.

Announced on Christmas Eve, the Trade and Cooperation Agreement – better known as the ‘Brexit Deal’ – leaves lots of question marks for those in financial services. Before anything else can be decided, the EU must first accept that Britain’s financial regulations are “equivalent” to those in the European Union: the Markets in Financial Instruments Directive (MiFID II).

Since its implementation in January 2018, MiFID II has transformed financial services with policies that promote transparency and trust across processes within the industry. As Britain navigates a new economic arena, many are hoping to avoid further instability by conforming to the existing internationally respected regulations.

Synchronising time under MiFID II

The MiFID regulations were implemented after the global financial crash of 2008 for a very simple reason: to prevent another crisis. The rules cover areas of financial practice that most people have never even considered. This means that British businesses are currently following an extremely clear and thorough guidebook that protects them from financial damage.

The rules on time synchronisation are one notable example of this. Accurate time is at the heart of electronic trading – but all clocks naturally drift. It might not matter if the time on your phone is a few seconds out, but it does matter if the time is wrong on a busy server that transfers thousands of pieces of data every second of the day. If your server’s clock is wrong, data logs can become confused, transactions may be cancelled, and you will be vulnerable in the event of a dispute.

Accurate time is at the heart of electronic trading.

This is where MiFID II comes in. Article 50 restricts every server that is an active market participant to a maximum divergence of between 100 microseconds and 1 millisecond (depending on the type of trading) from the benchmark of UTC (Universal Time).

MiFID II is vital in protecting the best interests of British businesses, but the importance of the regulations go even further. As British financial services look to recover from the shock of the COVID-19 pandemic, Britain must do everything it can to stabilise its position in the global economy.

Amending MiFID II is a threat to this stability, as international trust in a country’s financial market is dependent on the extent of its regulations. This was made evident last February when the pound dropped sharply against the US dollar following suggestions of a MiFID “shake up” by the ESMA.

Smarter regulating solutions

In the past, some groups have been resistant to upholding financial regulations because it has been expensive to do so. To get precision timing, companies had to install and maintain a satellite receiver at every active trading venue, secure access to a grandmaster clock, and spend resources on monitoring and verifying their data logs.

Recent technological developments have made this reluctance redundant. Smarter solutions have entered the market that make carrying out the best financial practice a lot easier and more cost-effective. Traceable Time as a Service (TTaaS) is the premier network-delivered solution for time synchronisation. The software product synchronises your clocks and monitors data for you; no hardware or maintenance is required.

Financial firms across Britain have spent the past three years implementing processes that adhere to MiFID II. Instead of “shaking up” the rules once again, consistency is needed as the industry moves forward.

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Ever since its inception, MiFID II has played an essential role in rebuilding trust in the financial markets. Regulations like those placed on time synchronisation ensure that these markets are both reliable and protected and they have never been more easy or cost-effective to implement. This trust is something that Britain should not take for granted as the world enters an extremely turbulent economic period.

Nearly €6 billion of EU share dealing was moved away from London on Monday as the effects of Brexit compelled equities trading to shift to EU cities, the Financial Times reported.

Trading in equities for the likes of Deutsche Bank, Santander and Total moved to exchanges in mainland capitals – primarily Madrid, Paris and Frankfurt. London’s Euro-dominated share trading hubs, including Cboe Europe, Aquis Exchange and Turquoise, shifted to newly established venues in the EU. The volume amounted to about a sixth of all equity business on European exchanges on Monday.

The change came abruptly for London investors, who were previously able to trade shares in Europe across borders without restrictions. Now, EU-based banks and asset managers will be required to use a platform inside the bloc for Euro share trading.

The shift in equity trading is far from the only effect that Brexit is set to have on London markets. The Brexit deal agreed before Christmas does not cover financial market access, with EU regulators refusing to recognise the bulk of the UK’s regulatory systems as “equivalent” to its own.

Temporary measures were put in place before the exit to allow UK financial firms to use venues in the EU.

“The FCA continues to view the agreement of mutual equivalence between the UK and EU as the best way to avoid disruption for market participants and avoid fragmentation of liquidity in DTO products,” the FCA said, adding that it will consider by 31 March “whether market or regulatory developments warrant a review of our approach.”

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Also on Monday, EU regulators withdrew the registration of six UK-based credit rating agencies and four UK trade repositories, compelling EU companies to use EU-based entities for information on derivatives and securities financing trades.

Paul Marcantonio, Executive Director for the UK & Western Europe at ECOMMPAY, offers Finance Monthly his predictions for open banking and the fintech sector in 2021.

The UK leads the charge in open banking; 2019 bore witness to a surge of growth in the country’s open banking ecosystem, when UK open banking hit one million users, regulated providers hit 204 and there were 1.25 billion API calls. It is evident that open banking has played a significant role in consolidating London’s place as a global leader in the fintech industry, comparable only to New York. With Brexit looming, there are many unknowns on the road ahead for UK businesses and their ability to deliver open banking services to the wider EU market after 31 December. Will open banking be affected by Brexit? And what is the outlook for the UK fintech sector in the new year?

The Brexit effect

Many companies are worried about maintaining the smooth digital experience that the modern consumer now prioritises post-Brexit. Looking ahead, UK businesses will lose their ‘passporting’ rights to do business across the EU, with organisations in the EU suffering similar barriers when seeking to operate in the UK. To overcome this barrier, many firms have created bases in the EU, while companies are also applying to the FCA for temporary permission to operate in the UK.

In order to minimise the disruption to open banking services post-Brexit, the FCA has said that third-party providers (TPPs) will be able to use an alternative to eIDAS certificates to access customer account information from account providers, or to initiate payments. eIDAS certificates of UK TPPs will be revoked when the transition period ends on 31 December. This means that TPPs have a compliant way to access customer information and ensures any changes as the UK leaves the EU will be smooth.

Businesses are having to audit their suppliers, as well as their payment service providers, to ensure they have all the necessary licenses to operate in the EU. Many companies are also building separate EU entities so that they can function in the EU under any Brexit agreement.

Many companies are worried about maintaining the smooth digital experience that the modern consumer now prioritises post-Brexit.

EU regulations

The role of open banking will only increase after Brexit, since the open banking agenda cannot be achieved by existing major banks. Open banking allows banking services to digitise so that consumers gain access to more choice than ever before, and extends the market to new entrants able to offer products and services that banking incumbents do not.

Furthermore, regulatory intervention serves to foster competition in the finance industry and is evidently necessary. The EU Payment Services Directive 2 (PSD2) was brought in during September 2018, and brought open banking requirements in across the EU, going further than the Retail Markets Investigation Order 2017 (CMA Order) in the UK which mandated that the biggest banks provide customers with the ability to share data with authorised APIs. The CMA Order revealed how regulation can motivate banks to modernise their services, but PSD2 gives consumers more choice and protection in opening up payments to third parties so they can access a variety of options when deciding how to pay and with whom to share their data.

Consequently, PSD2 will be a crucial mechanism for the UK financial services industry in order to remain competitive in Europe and across the world. The UK will therefore need to ensure it complies with EU regulations if it is to cement its position as a leader in open banking and continue to let the sector thrive. This means the UK is likely to align with EU regulation where it meets the needs of its own internal market, and is predicted to use regulation as a blueprint for its own but adjusted to meet its separate needs.

The road ahead for UK open banking  

Regardless of the nature of the UK’s relationship with the EU, many experts suggest the UK open banking standard is broader than the EU’s PSD2, and therefore has potential to be utilised as a blueprint for other countries worldwide. Although the route forward for open banking is not clear, what is evident is that open banking technology will carry on driving innovation and competition within the financial services industry, with the consumer able to access more convenience and choice.

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The UK will make routes to economic growth a priority, which means open banking must play a major part in this. After the UK agrees technical standards and governance, open banking can present a competitive advantage via open APIs and enable the fintech sector to benefit from sustained growth into 2021 and onwards.

Learnings for businesses 

The modern consumer wants efficiency, with services and products on demand. As such, open banking must be looked to when seeking to cater to the consumer. For example, cross-border payments, innovation around APIs, and automation, are all enabling companies to simplify complex payment processes, and make the experience quicker and easier, as well as allowing for easy scaling.

Payment solutions such as ECOMMPAY’s utilise open banking technology to enable consumers to initiate payments to merchants without the need for debit or credit card transactions, and are crucial in expediting efficient payments within and across borders, customised according to localised requirements.

Brexit has been on the horizon for several years now, allowing businesses time to establish contingency plans. As long as companies have invested wisely in their payment infrastructure, they will be in a good place to ensure sustainable growth for years to come.

Ammar Akhtar, co-founder and CEO at Yobota, explores the steps necessary to the creation of successful fintech.

The first national lockdown in March highlighted the importance of the quality and functionality of digital banking solutions. Indeed, most of us quickly became accustomed to conducting our financial affairs entirely online.

Financial services providers have needed to adapt to this shift, if they were not already prepared, and consumers will continue to demand more. For instance, Yobota recently surveyed over 2,000 UK adults to explore how satisfied customers are with their recent banking experiences. The majority (58%) of banking customers said they want more power to renegotiate or change their accounts or products, with a third (33%) expressing frustrations at having to choose from generic, off-the-shelf financial products.

Consumers are increasingly demanding more responsive and personalised banking services, with the research highlighting that people are increasingly unlikely to tolerate being locked into unsuitable financial products. This is true across all sectors of the financial services landscape; from payment technologies (where cashless options have become a necessity as opposed to a trendy luxury) to insurance, the shift to “quality digital” poses challenges throughout the industry.

Providers and technology vendors must therefore respond accordingly and develop solutions that can meet such demands. Many financial institutions will be enlisting the help of a fintech partner that can help them build and deploy new technologies. Others may try to recruit the talent required to do so in-house.

The question, then, is this: how is financial technology actually created, and how complicated is the task of building a solution that is fit for purpose in today’s market?

Compliance and regulation

The finance sector is heavily regulated. As such, compliance and regulatory demands pose a central challenge to fintech development in any region. It is at the heart of winning public trust and the confidence of clients and partners.

Controls required to demonstrate compliance can amount to a significant volume of work, not just because the rules can change (even temporarily, as we have seen in some cases this year), but because often there is room for interpretation in principle-based regulatory approaches. It is therefore important for fintech creators to have compliance experts that can handle the regulatory demands. This is especially important as the business (or fintech product) scales, crosses borders, and onboards more users.

The finance sector is heavily regulated. As such, compliance and regulatory demands pose a central challenge to fintech development in any region.

Businesses must also be forthcoming and transparent about their approach towards protecting the customer, and by extension the reputation of their business partner. Europe’s fintech industry cannot afford another Wirecard scandal.

Compliance features do not have to impede innovation, though. Indeed, they may actually foster it. To ensure fintech businesses have the right processes in place to comply with legislation, there is huge scope to create and extend partnerships with the likes of cybersecurity experts and eCommerce businesses.

The size and growth of the regulation technology (regtech) sector is evidence of the opportunities for innovations that are actually born out of this challenge. The global regtech market is expected to grow from $6.3 billion in 2020 to $16.0 billion by 2025. Another great example would be the more supportive stance regulators have taken to cloud infrastructure, which has opened up a range of new options across the sector.

Addressing technical challenges 

It is the technical aspect of developing fintech products where most attention will be focused, however. There are a number of considerations businesses ought to keep in mind as they seek to utilise technology in the most effective way possible.

Understanding the breadth of the problem

The fintech sector is incredibly broad. Payment infrastructure, insurance, and investment management are among the many categories of financial services that fall under the umbrella.

A fintech company must be able to differentiate its product or services in order to create a valuable and defensible competitive advantage. So, businesses must pinpoint exactly which challenges they are going to solve first. Do they need to improve or replace something that already exists? Or do they want to bring something entirely new to the market?

The end product must solve a very specific problem; and do it well. A sharp assessment of the target market also includes considering the functionality that the technology must have; the level of customisation that will be required from a branding and business perspective; and what the acceptable price bracket is for the end product.

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Knowing your client

In the same vein, as a vendor it is important to be specific and strategic when it comes to pursuing the right clients. A fintech might consider itself to be well-positioned to cater to a vast selection of different businesses; however, it’s important to have a very clear target client in mind. This will ensure product and engineering teams have a clear focus for any end goal.

The value of a good cultural fit should also not be underestimated. The business-to-business relationship between a fintech and its client (a bank, for example), particularly at senior levels, is just as important as finding the right niche. There must be a mutual understanding of what the overall vision is and how it will be achieved, including the practical implementation, timeline and costs.

Balancing “best tech” with (perceived) “best practice”

Leveraging the newest technology is not always the best approach to developing a future-proof proposition. This has been learned the hard way by many businesses keen to jump on the latest trends.

Shiny new technology like particular architectures or programming languages can have an obvious appeal to businesses looking to create the “next big thing”. But in reality, the element of risk involved in jumping on relatively nascent innovations could set back progress significantly.

The best technology systems are those that have been created with longevity in mind, and which can grow sustainably to adapt to new circumstances. These systems need to run for many years to come, and eventually without their original engineers to support them, so they need to be created in modern ways, but using proven foundational principles that can stand the test of time.

Curating a positive user experience

To revert back to my original point, fintech businesses cannot forget about the needs of the end customer. There is no better proof point for a product than a happy user base, and ultimately the “voice of the customer” should drive development roadmaps.

The best technology systems are those that have been created with longevity in mind, and which can grow sustainably to adapt to new circumstances.

Customer experience is one of the most important success factors to any technology business. Fintechs must consider how they can deftly leverage new and advancing technology to make the customer experience even better, while also improving their underlying product, which users may not necessarily see, but will almost certainly feel.

Another important consideration is ease of integration with other providers. For example, identity verification, alternative credit scoring, AI assisted chatbots and recommendation algorithms, next generation core banking, transaction classification, and simplification of mortgage chains – these are all services which could be brought together in some product to improve the experience of buying a mortgage, or moving home.

Progressive fintech promotes partnerships and interoperability to reduce the roadblocks that customers encounter.

The human side of fintech

Powerful digital solutions cannot be created without the right people in place. There is fierce competition for talent in the fintech space, especially in key European centres like London and Berlin. Those who can build and nurture the right team will be in a strong position to solve today’s biggest challenges.

In all of these considerations, patience is key. It takes time to identify new growth opportunities; to build the right team that can see the vision through; and to adapt to the ever-changing financial landscape. Creating fintech is not easy, but it is certainly rewarding to see the immense progress being made and the inefficiencies that are being tackled.

Price comparison website ComparetheMarket has been issued a £17.9 million fine by the Competition and Markets Authority (CMA) for overcharging on home insurance.

An investigation by the competition watchdog found that the site imposed “most favoured nation” clauses in contracts between December 2015 and December 2017 that prohibited home insurance providers selling on its platform from offering lower prices on other comparison websites, protecting ComparetheMarket from being undercut by competitors.

The CMA said that the policy “limited competitive pressures” on insurers selling through ComparetheMarket and made it more difficult for competing price comparison websites to grow and challenge the company’s entrenched market position. The resulting slack in competition between ComparetheMarket and these other sites also resulted in higher insurance premiums, according to the CMA.

“Price comparison websites are excellent for consumers,” said Michael Grenfell, executive director for enforcement at the CMA. “They promote competition between providers, offer choice for customers, and make it easier for consumers to find the best bargains.”

“It is therefore unacceptable that ComparetheMarket, which has been the largest price comparison site for home insurance for several years, used clauses in its contracts that restricted home insurers from offering bigger discounts on competing websites — so limiting the bargains potentially available to consumers.”

ComparetheMarket hit out at the ruling. “CompareTheMarket.com is disappointed with the CMA’s decision and does not recognise its analysis of the home insurance market,” the company said in a statement.

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“We fundamentally disagree with the conclusions the CMA has drawn and will be carefully examining the detailed rationale behind the decision and considering all of our options.”

ComparetheMarket is one of the UK’s largest price comparison websites and well-known for its television adverts featuring meerkat puppets.