UK and EU payments, cryptocurrency regulation divergence

In 2023, the UK will accelerate its divergence from EU payment and cryptocurrency regulations.

Meanwhile, the EU is pushing ahead with its political agenda and will continue to chart a course without the UK in 2023

When it comes to financial regulations, the UK’s Financial Services and Markets Bill (FSMB) forms the centerpiece of 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 risen to the post of prime minister, outlined how the new approach embodies “a complete sweep – a complete rollback – essentially of all EU law retained in the field of financial services”.

Specifically, Sunak pointed to provisions in the bill intended to make the UK’s financial services sector more internationally competitive. He said he would remove some limits and limits on financial market trading so that “market activity is not unreasonably restricted.”

Different directions for Crypto

Naturally, “market activity” these days includes trading cryptocurrencies, an area where both the UK and the EU will adopt and amend their own new regulations in 2023.

In the final stages of its passage through the House of Commons in the autumn, a number of changes were made to the FSMB to ensure cryptocurrencies fall under the regulatory purview of the Financial Conduct Authority (FCA).

As a result, the FSMB calls for a comparison with the EU’s Cryptocurrency Markets Regulation (MiCA), also slated for adoption in 2023 after the delay of a vote initially scheduled for December.

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

Distinguishing this from the EU’s “more legalistic approach,” during a debate on cryptocurrency regulation, Fuller said, “in the UK we trust regulators to work quickly and effectively to write the rulebooks that are right at that moment”.

This point can be seen in the different ways FSMB and MiCA have defined cryptographic assets.

While the former reserves just one passage to a rather broad definition while retaining the Treasury’s authority to change that definition, the latter is a dedicated legal instrument intended to regulate the space, complete with a detailed taxonomy of the different types of cryptocurrencies it covers.

What’s in store for the European payment regulation

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

The FCA has already exercised its power to amend the regulation that payment service providers must comply with so that it no longer reflects the EU’s approach.

For example, earlier this year, the regulator changed its definition of Strong Customer Authentication (SCA) to adopt a broader concept of “reherence.”

Referring to the EU regulation that UK firms were previously bound by, the FCA writes that “we believe the EBA’s guidance … may be unnecessarily restrictive and not accurately reflect what inherence means.”

As a result, the FCA has updated its guidelines to allow for data-driven behavioral analysis, differentiating its approach from that of the EU, where only behavioral analysis rooted in physical attributes is considered an adequate identification feature for customer authentication.

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

For example, in its official work program for the year, the European Commission indicates an early review of late payment rules aimed at forcing businesses to pay their invoices within 30 days.

Perhaps the biggest change to the EU regulatory framework for payments currently being worked on is the Third Payment Services Directive.

While the initial process started in 2022, more details on the new directive are expected in 2023. Currently, PSD3 appears to require some kind of standardization of the API (Application Programming Interface) for open banking, one of the main recommendations of the European Union Banking Authority.

The UK is also moving forward to adapt its open banking framework.

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

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

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