November 2020, Edition 1
Welcome to the first issue of Ashfords Fintech Digest. This Digest provides insights into the recent developments of the Fintech sector as well as important legal and regulatory updates.
Visa introduces Fintech Partner Connect programme
Visa has announced its European roll-out of the Fintech Partner Connect initiative following a successful test run. As part of the scheme, Visa will provide financial institutions and merchants with access to a panel of specially selected fintech partners offering a suite of value added payment services. Partners include Aire (a credit scoring startup), Onfido (an ID verification company) and AccountScore (a credit risk analytics firm).
The digital payment space and online banking has been a growing area for some years and demand has increased during the Covid-19 pandemic. The scheme aims to help fintech companies develop the next generation of digital solutions.
European Central Bank highlights risks of stablecoins to consumers
Fabio Panetta, a senior executive at the European Central Bank ("ECB") has highlighted the threats to consumers that stablecoins (a digital currency linked to a fiat currency) could pose. He warns that financial stability and data privacy could be at risk from digital currencies such as Facebook's Libra. Once released, Libra would be available to around 3 billion users. He also raises concerns that users of stablecoins are not protected by traditional banking safeguards and would bear all the financial risk.
Panetta further notes that the growing number of digital currencies could pose serious risks to the EU's market structure and increase reliance on the big technology firms who would encourage users to use their stablecoins for everyday transactions.
The ECB's president Christine Lagarde announced in October that the bank should be prepared to issue a digital euro. This announcement came shortly after China unveiled plans for a digital yuan, which has already been rolled out as part of a trial in Shenzhen. It is not yet clear whether the digital euro will follow the centralised version of the digital yuan or be decentralised.
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Companies focussing on environmental, social and corporate governance seeing stronger returns in 2020
Fidelity’s Putting Sustainability to the Test report released on 9 November 2011 has shown a strong correlation between equity market performance and their Sustainability Rating.
Environmental, social and governance ("ESG") investment has accelerated in recent years and data from the Investment Association shows inflows into ESG funds have quadrupled in 2020 to date, with £7.1bn invested in such funds over the first three quarters of this year compared to £1.9bn.
Fidelity notes that their research indicates that the market discriminates between companies which focus on ESG and that sustainable investing will become more commonplace in successful portfolio management.
LEGAL & REGULATORY
The UK Government is proposing increased powers to block or modify foreign investment in the UK
The proposed National Security and Investment Bill (the “Bill”) will tighten governance relating to foreign investment in critical infrastructure and defence industries in the UK. The restrictions include conditions to a transaction or blocking a transaction as the last resort and the ability to retrospectively unwind acquisitions up to five years after the transaction was completed – this bill could even potentially extend to minority investments made by overseas venture capital funds and other investors into UK companies.
The Bill will apply to technology and intellectual property as well as corporate takeovers and will mirror similar legislation in the USA and Australia. The proposals aim to address concerns about Chinese ownership in key parts of the economy. The current rules were initially introduced in 2002 with some incremental revisions in 2018 to include rules around takeovers in the areas of dual-use military technology, computer hardware and quantum technology.
The Bill was introduced to the House of Commons on 11 November 2020, having been announced in the Queen's Speech on 19 December 2019.
EU crowdfunding regulation and directive to amend MiFID II are now in force - but UK will not implement
Regulation (EU) 2020/1503 on European crowdfunding service providers for business (the EU Crowdfunding Regulation) was published in the Official Journal of the European Union. At the same time, Directive (EU) 2020/1504 was published to exclude crowdfunding service providers from the scope of Directive 2014/65/EU on markets in financial instruments (MiFID II). Both instruments were adopted by the European Parliament and Council on 7 October 2020 and entered into force on 10 November 2020.
The new rules improve access to crowdfunding as a form of finance for small investors and businesses in need of funding, particularly start-ups. Investors on crowdfunding platforms should benefit from a better protection regime and a higher level of guarantees, based on:
clear rules on information disclosures for project owners and crowdfunding platforms
rules on governance and risk management
a coherent approach to supervision
However, it appears that the UK will not make similar changes as following an active review by the Government it was determined that the implementation of the EU crowdfunding regime in the UK would not result in material benefit to the UK crowdfunding sector (mainly on the basis that the final EU text shares key similarities with existing UK regulation).
ISDA on legal issues of using smart derivatives contracts on distributed ledger technology
The International Swaps and Derivatives Association (ISDA) has published four white papers analysing the legal issues surrounding the use of smart derivatives contracts on distributed ledger technology (DLT), respectively, from a French, Irish, Japanese and New York private law perspective. The analyses focus on two particular issues: (1) whether the introduction of a DLT platform to a traditional trading relationship would impact the resolution of contractual disputes, and (2) how to identify the legal situs of digital assets in order to effect payment or exchange collateral on certain DTL platforms.
BIS working paper looks at relation between regulatory sandboxes and fintechs’ access to finance
The Bank for International Settlements (BIS) has published a working paper on the effectiveness of the regulatory sandboxes in improving fintechs’ access to finance. BIS found that firms entering the sandbox see a significant increase of 15% in capital raised post-entry, relative to firms that did not enter; and their probability of raising capital increases by 50%.
FSB consults on regulatory and supervisory issues relating to outsourcing and third-party relationships
The Financial Stability Board (FSB) has launched a discussion paper for public consultation on the regulatory and supervisory issues relating to outsourcing and third-party relationships. The discussion paper draws on findings from a survey conducted among FSB members, and aims to facilitate a discussion on current regulatory and supervisory approaches to the management of outsourcing and third-party risks. This could be important for companies such as Amazon and other infrastructure providers which provide services to banks and other financial institutions.
OBIE launches consultation on variable recurring payments and sweeping evaluation
The Open Banking Implementation Entity (OBIE) has launched consultations on variable recurring payments (VRPs) and sweeping evaluation to facilitate the next stage in the development of open banking in the UK. Responses are sought by 4 December 2020.
Variable Recurring Payments (VRPs) allow customers to safely connect authorised payments providers to their bank account so that they can make payments on the customer’s behalf, within agreed parameters that offer more control and transparency than existing alternatives.
Sweeping is the automated movement of funds for a customer between two accounts in their name, usually to help the customer avoid charges or benefit from better interest rates.
Both processes are vital in the implementation of open banking.