The Lab’s Advocacy Associate, David Fagleman, sign-posts five key fintech policy debates for the year ahead.
There’s a fast-paced data revolution taking place in the UK, especially in financial services. New players and technologies are disrupting business-as-usual. With the growth of financial technology companies, or ‘fintechs’, the increasing role of Big Tech in finance, and new advances such as artificial intelligence impacting our financial lives, policy and regulation are racing to match the speed of change.
This blog highlights five key processes we’ve been following together with other civil society organisations in the Transforming Data Network, and which we think will have a major bearing on how far the future of finance serves people and planet.
In 2021, Britain was named “bank scam capital” of the world. Online fraud has thrived as criminals have taken advantage of COVID lockdowns and the increase in online shopping. According to Which?, the impact of scams on victim wellbeing costs £9.3bn a year, at a personal cost of £2,509 each.
With the proliferation of fraud and online scams, this year new protections should be introduced. Consumer groups and the Financial Conduct Authority (FCA) have already called on the upcoming Online Safety Bill to regulate scam adverts that are used to hook in thousands of victims of investment fraud and other cyber-enabled scams every year.
Another area of financial services that will be under the spotlight in 2022 is cryptocurrencies, which, according to the FCA, are held by 2.3 million adults (up from 1.9 million in 2020). Largely unregulated, cryptocurrencies (digital currencies that are transacted and verified by a decentralised system, such as Bitcoin and Ethereum), are considered “very high risk, speculative investments” by the FCA. The government announced earlier this year that it plans to strengthen the rules on crypto advertisements and protect consumers from misleading claims, when parliamentary time allows. The question about the environmental impact of cryptocurrencies remains unanswered.
Central Bank Digital Currency
Globally, central banks – such as the Bank of England – are developing Central Bank Digital Currencies (CBDCs). CBDCs are considered a potentially important way to make sure everyone can pay for things easily and securely in a world where cash use and acceptance is dwindling. They might also be necessary for nations to compete with global digital currencies, such as Facebook’s Diem, to maintain control over a country’s money and payments system. The Treasury and the Bank of England will be launching a consultation in 2022 to explore the feasibility of a CBDC in the UK – otherwise known as ‘BritCoin’. If this gets the green light, then it will be a potentially decade-long project that could change the structure of the financial system indefinitely.
Serious concerns around issues such as payments privacy, which would likely be lost in a digital cash system, need to be addressed. Visions for a UK CBDC have been offered by groups such as Positive Money; one of their suggestions, for example, is the creation of a public payments company that would make a CBDC inclusive and accessible to all sectors of society.
Buy Now Pay Later
Buy Now Pay Later (BNPL) products, offered by fintech companies such as Klarna and Clearpay, offer shoppers the ability to pay for goods in interest-free installments. This is good if you can make the payments, but bad if you miss one, as you’ll face high interest, possible late payment fees and a fall in your credit score. With more than 17 million people using these products, the government decided to consult on BNPL regulation late last year. Civil society organisations such as Citizens Advice, StepChange and Which? are calling for stronger safeguards to protect consumers. These include steps in the checkout process to ensure people understand they are borrowing money when they use BNPL, adding affordability checks to ensure they can’t hold multiple accounts from different providers, and warnings about the risks of using the schemes.
This year marks the fourth anniversary of ‘Open Banking’ – a major UK-led policy experiment designed to challenge the market dominance of the biggest banks and building societies, as well as to catalyse innovation and competition in payments. Open Banking certainly holds potential – but it has a long way to go. Just 5 to 8.5% of digitally-enabled consumers are estimated to be active users of at least one Open Banking service. Critically, we are also learning about the serious risks that Open Banking – but also Open Finance and Smart Data – pose, especially for people in vulnerable circumstances. Following an investigation finding that leadership failures allowed a culture of bullying and intimidation at the ‘Open Banking Implementation Entity’, we hope that this year the governance of Open Banking ensures that the voice of consumers and citizens are adequately represented in its ongoing development.
Fintech is considered an asset in the government’s efforts to grow the UK’s finance sector to be the most ‘competitive’ in the world. In response to the ‘Kalifa Review of UK FinTech’, published last year, the fintech sector has benefited from special visas for staff and changes to encourage investment, such as tax credits and new share listing rules. However, as the Bank for International Settlements has noted: “higher investment in fintech does not always lead to improvements for consumers or society”.
In 2022, a priority must be to ensure that developing a world-leading fintech sector cannot happen at the expense of people and communities here in the UK, particularly as we face a cost-of-living crisis and recover from the pandemic. For example, it is deeply concerning that essential insurance products have become harder to access for people in poverty or facing vulnerable circumstances, following the rise of the use of data and tech in the sector. Our response to the Kalifa Review sets out what the government should do next.
And that’s not all! For example, 2022 will see the progression of two important strategies laid out by the government last year: the National Data Strategy and National AI Strategy, both of which represent new frontiers and challenges for government policy.
If you’d like to find out more about fintech policy, or to get involved with the Transforming Data Network and collaborate with leading civil society advocates and academics who are dedicated to changing the finance system into one that is democratic, sustainable, just and resilient, then we’d like to hear from you!