UK and EU’s Payments, Crypto Regulation Divergence

In 2023, the U.K. will accelerate its divergence from EU payment and crypto regulations.

Meanwhile, the EU is moving ahead with its own policy agenda and in 2023 will continue to forge a path without the U.K.

When it comes to financial regulations, the U.K.’s Financial Services and Markets Bill (FSMB) forms the centerpiece of the government’s post-Brexit reform of the financial sector.

In a September debate on the bill, Rishi Sunak, who was a backbencher at the time but has since ascended to the prime ministership, outlined how the new approach embodies “a full sweeping away — a full revocation — of essentially all the retained EU law concerning financial services.”

Specifically, Sunak pointed to provisions in the bill intended to make the U.K. financial services sector more internationally competitive. He said it will remove certain caps and limits on financial market trading so that “market activity is not unreasonably restricted.”

Different Directions for Crypto 

Of course, these days “market activity” includes trading in crypto assets, a field in which both the U.K. and the EU are set to adopt and amend their own new regulations in 2023.

In the final stages of its passage through the House of Commons in the fall, a string of amendments were made to the FSMB to ensure that it will bring crypto assets under the regulatory scope of the Financial Conduct Authority (FCA).

Accordingly, the FSMB begs comparison with the EU’s Markets in Crypto Assets (MiCA) regulation, also slated for adoption in 2023 following the delay of a vote initially scheduled for December.

In one summary of the different rules and regs, the U.K’s Economic Secretary to the Treasury Richard Fuller said that “the UK’s approach on a lot to do with financial services is to have an agile system that relies robustly on the regulators to write their rules as things are brought within the regulatory perimeter.”

Distinguishing this from the EU’s “more legalistic approach,” during a debate on crypto regulation, Fuller said, “in the United Kingdom we trust regulators to work at speed and effectively to write the rule books that are right at that point in time.”

This point can be observed in the different ways that the FSMB and MiCA have defined crypto assets.

While the former reserves just a single passage to a rather sweeping definition while retaining the Treasury’s authority to amend that definition, the latter is a dedicated legal instrument intended to regulate the space, replete with a detailed taxonomy of the different types of crypto assets it covers.

What’s in Store for European Payment Regulation

Aside from crypto markets, another key area of policy that will shape post-Brexit regulatory divergence in the coming months and years is payments.

Already, the FCA has exercised its power to amend the rulebook payment service providers have to play by so that it no longer reflects the EU’s approach.

For example, earlier in the year, the regulator changed its definition of Strong Customer Authentication (SCA) to adopt a more expansive concept of “inherence.”

Referring to the EU rulebook by which U.K. firms were previously bound, the FCA writes that “we consider that the EBA guidance … may be unnecessarily restrictive and not accurately reflect the meaning of inherence.”

Accordingly, the FCA has updated its guidance to allow for data-based behavioral analytics, differentiating its approach from the EU’s, where only behavioral analytics rooted in physical attributes are considered adequate identifying features for customer authentication.

Far from resting on their laurels, however, EU policymakers are also set to make changes to payment rules in 2023.

For example, in its official work program for the year, the European Commission points to an anticipated revision of late payment rules intended to force businesses to pay invoices within 30 days.

Perhaps the biggest change to the EU’s regulatory framework for payments currently being worked on is the third payment services directive.

While the initial process began in 2022, more details about the new directive are expected in 2023. Currently, it looks as if PSD3 will mandate some kind of Application Programming Interface (API) standardization for open banking, one of the key recommendations of the European Banking Authority.

The U.K. is also moving ahead to adapt its open banking framework.

Earlier this month, regulators outlined their vision for the next stage of open banking in the country, with more details expected in Q1 next year.

Central to the future regime will be a new authority designed to oversee the sector which will replace the existing Open Banking Implementation Entity and will be responsible for supporting innovation and competition in the space.

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