Things seem regal when documents carry the moniker of “Royal Ascent” and display the ancient coat of arms representing the United Kingdom. Still, the findings of the recently published Financial Services Act of 2021 provide a modern-day view for several leading-edge payment issues. Burges Salmon, a top UK law firm, provides a well-written summary of the 200 page Act. The top issues are:
- Changes to access around financial services markets
- Prudential regulation of investment firms and credit institutions
- A new consumer “duty of care”
- Buy-now pay-later (“BNPL”) – the Act provides HM Treasury with the power to bring interest-free BNPL products within the scope of FCA regulation.
- UK Benchmarks Regulation
- Insider dealing and money laundering
A regulatory challenge is that guardrails must exist to protect consumers, financial institutions, and investors, and frequently innovation outpaces the topics that regulators intended to address. Now, as the law firm summarizes: “the Act provides HM Treasury with the power to bring interest-free BNPL products within the scope of FCA regulation.”
When the UK’s Financial Conduct Authority (FCA) began, companies that charged interest were defined within their purview. No one anticipated the growth of Buy Now Pay Later lending. Since the BNPL model did not charge interest, there was limited power to enforce regulatory control.
The discussion of a “duty of care” is a yet-to-be settled issue, but it is similar to the Dodd-Frank requirement for responsible lending. As Investopedia defines the term: “Factors considered in the ability to repay include the borrower’s income, assets, employment status, liabilities, credit history, and the debt-to-income (DTI) ratio.”
Social lending issues range from what types of relief should past due cardholders must have to “should credit cards be allowed for use in gambling facilities.” Must lenders take responsibility to ensure that credit losses are not too high to bring strife to the household budget? These topics are yet to be resolved, but responsible lending will soon be the order of the day.
A takeaway on the UK Financial Services Act of 2021 is simple. It is an example of modernizing financial service regulations. It is relevant throughout the world. As a matter of fact, the governing rules around PayDay lending in the United States dates back to the 1916 publication of the Uniform Small Loan Law. Even the U.S. Truth in Lending (TILA) Act received structure in 1968. While some laws get updated, after 50 or 100 years, it might make sense to re-think the whole topic.
However, the most important topic is not in the FCA document but rather in the trend-setting position of ensuring relevance.
Expect to see changes from your local regulators sooner than later, but probably sooner.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
